Today, after the two-day FOMC meeting, a decision is likely to be made to raise the range for the federal funds rate by 25 basis points from 0-0.25 to 0.25-0.5 percent. This will be the first hike since December 2018.
The market has been speculating for months about what course the Federal Reserve will take in light of high inflation, a recovering labor market, wage pressures, as well as problems with the availability of particular commodities and the ongoing war in Europe.
Two compelling arguments for a hiking cycle
It seems that the Fed will opt for a cycle of interest rate hikes, taking care of its statutory objectives. The first is the situation on the labour market, which is very good. There is even a shortage of workers in the USA. The second is to take care of the price level. Here, inflation has already exceeded 2 percent for months.
However, the scale of price increases remains an open question. Investors seem to expect as many as seven increases, which would make up one of the larger cycles.
A factor mitigating expectations
However, there is a factor on the horizon that may dampen the enthusiasm for rapid rate hikes in the US. We are talking about the market expectations as to the shape of the yield curve in the future. The market is beginning to expect that the yield curve in the US, i.e. the difference in interest rates between 2-year and 10-year bonds, will be negative.
History seems to show that at least since the 1970s, there has not been a recession in the United States that was not preceded by an inversion of the yield curve. Therefore, this may be a factor that hinders the Fed's eagerness for milder rate hikes.
The Fed's decision will be made at 8:00 p.m. today, with the post-meeting press conference scheduled for 8:30 p.m., at which time we will hear FOMC members' views on the main US interest rate this year and next, as well as on inflation and the labour market.
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.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79.17% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
