Fed policy preview: What you should know as D-St braces for big rate hike

Fed policy preview: What you should know as D-St braces for big rate hike – Mail Bonus

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New Delhi: The US Federal Reserve will begin its two-day policy review later in the day. Thus, all eyes are on the amount of the interest rate increase that the US central bank could go for, this time.

A 75 basis point rate hike is what the consensus was looking at a few days ago, but given the inflationary pressures in the world’s largest economy, a 100 basis point rate hike cannot be ruled out.

Analysts said the Fed’s statement could acknowledge a slowing growth rate, while Federal Reserve Chairman Jerome Powell could signal the Fed’s focus on inflation at the news conference. He could hint at further rate hikes, analysts feared.

Recent data has shown signs of a slowdown in the US economy while inflation remained persistently high, with jobless claims rising to an eight-month high last week.

Market participants, at this point, have discounted a 75 basis point rate hike, said Gaurang Somaiya, currency and cattle analyst,

who added that a hawkish stance and a 100 basis point rate hike could strengthen the dollar against its major currencies.

Nomura expects a 100 basis point hike from the Fed at the July meeting and an increase in monthly core PCE inflation to 0.6 percent month-on-month in June.

The medium expects the US recession to begin in the December quarter, but persistently entrenched inflation will likely lead to continued Fed tightening through February, before a cut in the September quarter of 2023, it suggested.

“Incoming data suggests that inflation has stabilized relative to the Fed’s expectations. As a result, we maintain our expectation that the Fed will raise interest rates by 100 basis points in July, up from the 75 basis point increase in June. The updated FOMC statement will likely acknowledge “However, we believe Chairman Powell will continue to focus on inflation at the press conference and indicate that further rate hikes are likely,” Nomura said.

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Aishvarya Dadheech, fund manager at Ambit Asset Management, said that inflation in the US of almost nine percent is far from the central bank’s inflation target of two percent, and as a result at least 150 basis points of interest rate hikes in this cycle (July-August) are not possible. to exclude, effectively ending the pandemic’s support for the US economy.

“In fact, this initiative to control inflation will cause more pain to the US economy and its growth. An aggressive rate hike or a very hawkish comment for the remainder of the rate hike cycle will unsettle the market. The Fed will prioritize inflation over growth,” Dadheech said.

“The difference between the effective Fed Fund rate (1.55 percent) and the US 10-year yield (2.8 percent) will be covered by at least a 140-150 basis point rate hike this calendar year. when they have better visibility of any adverse effects on growth,” he added.

Naveen Kulkarni, chief investment officer at Axis Securities said the market is seeing a 75 basis point hike from the US Federal Reserve in July, a 50 basis point hike in September and then a 25 basis point increase in November and December to push the Fed’s rate to 3.25 percent by the end of the year.

“These rate hikes are already priced in by the market, and any additional hikes this year, other than those mentioned, could be viewed negatively by the markets. If the US economy slows significantly or if commodity prices fall further, there is a possibility that these proposed rate hikes may not go ahead, especially those in November and December,” he said.

Later this week on Thursday, market participants will be closely watching the second quarter US GDP follow-up, and a negative number could confirm expectations of a slowdown in the US economy. GDP has contracted in the last quarter, and another quarter of contraction could put the economy on the brink of recession, Somaiya said.

(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own. These do not represent the views of the Economic Times)

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