Yesterday evening, the minutes of the last Federal Reserve meeting were published. It brought the decision makers' perspective on the cycle of interest rate increases in the United States. The next key event, in turn, may be the US inflation reading.
Most Fed members judged that 50 basis point hikes in the target range of the federal funds rate would likely be appropriate at the next few meetings, according to the May FOMC meeting minutes. Policymakers also noted that a tight monetary policy stance may be appropriate depending on the changing economic outlook, which is seen as highly uncertain. The Federal Reserve raised the target federal funds rate by half a point in May, to 0.75-1 percent, the second consecutive increase in borrowing costs and the largest since 2000. It was introduced to combat soaring inflation.
U.S. central bank officials conveyed that further increases in the target range would be appropriate, with Governor Jerome Powell indicating increases of 50 basis points at the next few meetings. However, the interest rate market is not entirely sure whether such aggressive hikes will actually take place. The Fed updated its forecast for inflation as measured by the PCE index to 4.3 percent in 2022. It also lowered its forecast to 2.5 percent in 2023 and 2.1 percent in 2024. According to the market consensus, the US core PCE inflation reading of 4.9 percent may appear tomorrow. This would mark a retreat from the peak inflation of 5.4 percent in February.
Thus, if the Fed's forecasts come true, financial markets, including bonds, shares and other risky assets could discount the cycle of interest rate increases, and its peak could fall at 3-3.25 percent. This is also where the yields of 10-year US bonds have recently found themselves, now retreating to the region of 2.7 percent. This, in turn, could affect the US dollar or the stock market. In both cases, the recent strong trends, USD strengthening and stock corrections, may also be slowing down or slowly coming to an end.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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