27.07.2022 – The Federal Reserve is already moving prices again – by the time you read these lines, the hubbub has probably already broken out. As always, our advice is: Don’t trade around the Fed. Because the monetary guardians are rarely unambiguous. Both currency and stock markets will probably swing wildly back and forth for a while until the herd decides on a direction.
raders are lurking and waiting – you can see this very nicely in the hourly chart of the S&P 500 at noon German time on Wednesday. Shortly, the picture will have changed violently into a wild up and down.
Source: Bernstein Bank GmbH
These are the crucial questions: how high will the Fed raise interest rates? How much will it follow through with quantitative tightening? Will the central bank adjust its course because of a looming recession? It is not just the press release that is important, but above all the press conference: Fed Chairman Jerome Powell tends to wrap previously strong statements in absorbent cotton and tone them down. But who knows – maybe a clear positioning will slip out. And then there are the analysts’ reactions to the oracle’s statement.
High to 3.75 percent
You should compare the current news with the previously expressed expectations: This Wednesday, it’s expected to move up 75 basis points to 2.25 to 2.5 percent. A higher move is likely to push stocks lower; a lower rate hike is likely to lift prices higher. Expectations for the September meeting are: Interest rate step of 50 basis points; for November and December, the market expects another 25 basis points each. This would put the interest rate at 3.25 to 3.5 percent at the end of the year. According to current estimates by most analysts, the peak will be reached in February at 3.5 to 3.75 percent.
Question about new interest rate cuts
And new rate cuts are expected to begin in the first quarter of 2023. Or will this turnaround happen sooner after all? Let’s let the pros with their crystal balls have their say: Michael Harnett of Bank of America sees the “pivot” as early as November. Super-bear Michael Wilson of Morgan Stanley, on the other hand, just wrote that it would be premature to expect the Fed to stop tightening, even if there is speculation about a recession. The S&P 500 could therefore still slip to around 3,000 points.
Nothing is known for sure
Presumably, the Fed will point primarily to inflation for further action. And to the strength of the economy, especially the labor market. How clear this outlook is will set the course for the market. However, there’s one problem that doesn’t make things any easier: Nick Timiraos of the “Wall Street Journal” is considered an unofficial Fed spokesman. And the journalist just wrote that the Fed could do away with forward guidance without further ado. More confusion, then. We hope you are correct in the fog that lies over the market. Bernstein Bank wished you successful trades and investments!
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