25.07.2023 – Tomorrow, Wednesday, the Federal Reserve will again have its say. Apparently, the U.S. central bank has succeeded in containing inflation without choking off the economy. At any rate, optimism is growing about a “soft landing.” And about the fact that the cycle of interest rate hikes is coming to an end.
The stock market has already celebrated moderately: the Dow Jones – shown here in a daily chart – has just closed higher than it has in around fifteen months.
Source: Bernstein Bank GmbH
Currently, the federal funds rate is between 5.00 to 5.25 percent. Currently, according to the CME Fedwatch Tool, 98.9 percent of the market believes rates will rise to the 5.25 to 5.50 percent range tomorrow. You can imagine the swings if the Fed fails to meet this solidified expectation. A new rate move would be the 11th since March 2022 – and the highest interest rate in 22 years.
Economists surveyed by “Bankrate.com” see a peak in the key interest rate of 5.5 to 5.75 percent. Accordingly, 37 percent of the experts believe in another interest rate step and 33 percent even in two further rate hikes. The always well-informed “Wall Street Journal” also wrote in this direction: The Fed is not yet ready to declare victory over inflation
Growing optimism
Meanwhile, economists at Goldman Sachs have lowered the possibility of a U.S. recession from 35 to 20 percent. Even the rather pessimistic Deutsche Bank has meanwhile repositioned itself: “We have greater resiliency within the economy than I would have anticipated at this point in time, given the extent of rate increases we’ve gotten,” judged Matthew Luzzetti Chief Economist in the USA. Consumer spending remains high, he said, and many people still have reserves from the government stimulus from the Corona era and are now catching up on things they missed, such as travel, restaurants and entertainment.
Recession versus inflation
Indeed, the labor market also remains robust enough for further interest rate hikes: 209,000 new jobs were created in June, and the unemployment rate fell to 3.6 percent – nearly the lowest level in half a century. Meanwhile, inflation has slipped: from 9.1 percent in June 2022 to 3 percent most recently. The Fed’s target of 2 percent seems close to being reached.
Our conclusion: pay attention to the Fed’s expectations management. Important will again be the choice of words in the press release and in Jerome Powell’s press conference. Presumably, there will be no euphoric undertone – that would whip prices upward. But even the slightest hint that mission tightening is almost accomplished will please the bulls. Conversely, the bears will be served if the Fed is overly cautious about the economy and inflation and hints at an even stronger than expected need for action on interest rates.
It remains to be added that the current reporting season with more than 500 corporations this week also gives a hint about the current economic situation and the scope for interest rates. In this sense: Bernstein Bank wishes successful trades and investments!
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