Interest rates: will the Fed push ahead or pause?
The Federal Reserve decides on US interest rates next week, markets are pricing in a pause, but it may be just that, a pause.
At 10 straight meetings over the past 14 months the Fed has jacked up its key rate by a full five percentage points, the fastest pace of increases in 40 years. This has taken rates from flat to a 16-year high. The purpose? To fight inflation.
Economists see this coming meeting as an opportunity to pause to see what degree of a slowdown it's managed with its action so far. Markets are beginning to price in a further possible 25 basis points at the end of July.
(Video Transcript)
US Federal Reserve (Fed) decides on interest rates on Wednesday at 7:00 PM UK time and markets are pricing in a pause on the Federal Reserve after 10 straight meetings in which it jacked up its key rate by full five percentage points in 14 months. This is the fastest rate if increases in 40 years.
Now, this has taken rates from flat to a 16-year high. The purpose? To fight inflation. Economists do see this coming meeting as an opportunity to pause to see what degree of a slowdown it's managed with its actions so far. Markets are beginning to price in a further possible 25 basis point rise at the end of the July meeting ahead of the Fed decision.
Inflation
Note that next week markets will get an update on US inflation. The consumer price index (CPI), due on Tuesday, is expected to fall to 4.7% year-on-year (YoY), following the 4.9% rise in the previous month. The focus will be on core CPI forecast of four to 5.4% year on year, from 5.5% in April.
Now since the March headline, the CPI figure is below the core CPI. The market fears the spread between the two indicators could be widening. In other words, energy prices might go down. Broad-based inflation could be stickier than thought from 0.4 percentage points in March to 0.6 percentage points in April.
If Tuesday's reading matches the forecast, that will appear to be a 0.7 percentage point spread.
USD
Now one of the ways we can measure what's going on is taking a look at what's been happening with the dollar and the dollar has been down this week overall. Yesterday, big declines in the US dollar - 10298.
Now if the Fed does pause, this might give further food for these equity markets where we've seen an 11.15% rise so far this year, for the S&P 500, and we could see further upside if we do get the Fed pausing and giving us some sort of an indication that the Federal Reserve is now becoming more dovish.
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