The likelihood of a recession in the US is highest since November 2007. The European Central Bank is lowering its deposit rate and resuming its asset purchase program. Donald Trump criticizes the strong dollar and blames the Fed for its lack of action. Will the US Federal Reserve live up to all these expectations after a two-day meeting?
The meeting of the Federal Open Market Committee started yesterday will have its finale today, September 18, at 20:00. Then the decision on interest rates will be published together with the latest macroeconomic projections of the Fed. Interestingly, the interest rate market is no longer so convinced that today the Federal Reserve will reduce the cost of money from 2.00-2.25 percent to 1.75-2.00 percent. Just a week ago, the probability of interest rate cuts was almost 90 percent. Currently, according to CME data, this probability is only 56.5 percent. In other words, today's cut is not so obvious and if it did occur, it could lead to a weakening of the USD.
In addition, Fed projections will be key. In June, it was noted that at the end of 2019, the effective Fed rate would be 2.4 percent. Today we know that it will be at a lower level. The only question is whether 1.9 or 1.7 percent. (one or two cuts until the end of the year). The same applies to the projection for subsequent years. In this context, expectations for next year may be interesting. According to the Cleveland Federal Reserve model, the probability of a recession in the US during the summer of 2020 is almost 45 percent. We observed such estimates for the last time at the end of 2007. What is even more interesting, in the last 60 years only in 1967, a similarly high probability of recession did not end with recession. All other readings ended with a huge slowdown in the US economy.
The Fed currently has a difficult task because the economy, apart from industry, is developing very solidly. The labor market is strong, wages and consumption are rising and inflation is at the desired level. On the other hand, there is a trade war, which is unknown when it will end and how it will go on and what the situation on the oil market will look like and whether the conflict in the Middle East will escalate. Nevertheless, the Fed must express its opinion on the current situation and future expectations. The press conference after the decision will take place at 20:30. So tonight all eyes will be on the Fed.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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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