25.08.2022 – Tomorrow, Friday, is the day: Wall Street and the rest of the stock market world will be glued to their screens, watching Jerome Powell’s words. The head of the Federal Reserve will deliver a speech at the global central bank meeting in Jackson Hole, Wyoming. Aggressive tightening or a pause due to recession risk? Easing or a surprise move with even higher interest rates? We are eager to see the tightrope act.
At 10 a.m. local time it will be exciting, then Powell will step to the microphone at the Grand Teton. And then we will hopefully get an answer to the question of what the major central banks mean when they give their annual symposium the title “Reassessing the constraints on the economy and policy”.
Tightening or easing?
At the moment, a majority in the US is assuming an interest rate hike of 75 basis points on 21 September. This is because inflation in the US is raging at 8.5 per cent. However, rising prices could turn into a buying strike and trigger a recession, signs of which can already be seen in the housing market and the service sector. Which argues for low interest rates. So will the Fed stick to its tightening, which could stifle the economy? Or will the central bank ease a little and risk a renewed rise in inflation? The interest rate-sensitive high-tech stocks in particular currently illustrate the directionless hope and trepidation – the Nasdaq 100 hangs between the 200-day moving average (above) and the 50-day moving average on the daily chart.
We found the most convincing forecast for what is likely to come at Goldman Sachs. Economists Jan Hatzus and David Mericle believe Powell will make the case for tightening, as he did in the July press conference and as can be read in the July Fed minutes. At the same time, however, he would reaffirm the Fed’s willingness to lower inflation. Furthermore, Powell will probably point out that the September meeting will depend on the latest data coming in. We think: This does look very much like Powell initiating the withdrawal of future large rate hikes.
Goldman sees dovish signals
The bottom line: Goldman expects a rate hike of only 50 basis points in September and only 25 points in November and December. Which the market should celebrate. However, there are upside risks to the rate forecast of 3.25 to 3.5 per cent: for example, the robust labour market and the stickiness of rising wages and inflation. Nevertheless, if the FOMC decides to tighten more aggressively, it is more likely to be several 50-point steps than 75 points in September.
We summarise: If the Fed goes ahead as expected by the gold men because of the risk of recession, the result should be rather bullish for Wall Street – because then it means more money for the market again. So let’s wait and see – Bernstein Bank wishes you successful trades and investments!
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