The US Federal Reserve started a new cycle of interest rate hikes yesterday. The previous one started in 2015 and lasted 3 years. The current one may last at least 2 years.
By the decision of the FOMC, the range for the federal funds rate will increase from 0-0.25% to 0.25-0.5%. According to macroeconomic projections, the Fed's goal may be to reach an interest rate level of 2.75-3.00%.
In a month or two, a rate hike twice as big?
This means an interest rate hike every meeting this year and 3-4 hikes next year. It is possible that US interest rates will rise by 0.5 percentage points at one of the next two meetings.
After yesterday's decision, the market first reacted with a retreat from risky assets, and then adopted a risk-friendly attitude. Stock indices rose and the dollar weakened. It seems that this can be attributed to the words of Jerome Powell, the head of the Fed. He is trying to dissuade the markets from pricing a possible recession in the United States, which could have been indicated earlier by the shape of the yield curve. According to Powell, the US economy is strong enough to easily cope with an increase in the cost of credit.
Time for the Bank of England's retort
Today we will learn the Bank of England's decision on interest rates. It may be quite an interesting duel between central banks as to which of them will lead in this cycle and raise interest rates faster and more significantly. This could in turn affect the GBP/USD pair's quotes.
The Bank of England is expected to raise the key interest rate by 25 basis points today, which would mark the third consecutive increase in borrowing costs and return interest rates to pre-crisis levels. UK inflation remains at levels not seen since 1992, although the latest CPI report has yet to include the impact of Russia's war of invasion in Ukraine on food and energy prices.
Markets are betting that interest rates in the UK will reach 1 percent in May. Investors may be interested in the economic outlook according to the central bank and possible balance sheet reduction plans.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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