Financial markets are reacting to statements by the Federal Reserve chairman, who made no secret of the likelihood of a recession in the US due to the current situation and the need for further interest rate hikes.
Jerome Powell in Wednesday's testimony before the Senate Banking Committee admitted that rapid interest rate hikes could trigger a recession in the US. Its avoidance depends mainly on factors beyond the Fed's control. Another risk is that price stability may not be restored and that high inflation may take root in the economy, but the Fed's goal is to bring price growth back to the 2 percent level. - Powell added.
The Fed chairman said further interest rate hikes would be appropriate to quell surprisingly high inflation. More surprises may come later in the year. Therefore, the Fed will have to react to incoming data and the changing outlook.
The Federal Reserve raised the funds rate by 75 basis points to 1.5-1.75 percent at its June 2022 meeting, instead of the 50 basis points initially expected, after inflation unexpectedly accelerated to a 41-year high last month.
The market consensus is that the Federal Reserve will raise interest rates by another 75 basis points in July, followed by 50 basis points in September. Nevertheless, the Fed chairman's clear statements effectively spooked investors in the commodities market and encouraged investors in the bond market. In theory, the recessionary phase of the business cycle is the bond phase of the cycle. As a recession approaches, investors begin to assume that interest rates may be catching their peak a little earlier and thus bond yields may no longer rise so sharply. This, in turn, can push bond prices higher.
Meanwhile, a recession means less demand for commodities, which may mean that when the bond market peaks, the commodity market may peak. Then, as bond prices rise, commodity prices may fall, which is what business cycle theory assumes. Will this be the case? We will likely find out in the coming quarters.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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