All eyes on the Fed. Recent rate hike?

In the United States, the main interest rate was raised by 2022 basis points from March 500. This is the largest increase since the early 80s.

There will probably be another one today move up by 25 basis points. Given this aggressive braking maneuver and the inverted yield curve from mid-2022, most economists have been assuming for some time that The Fed will trigger a recession. The bond market is of a similar opinion. So far, however, there has not been much evidence of an incipient slowdown.

The US economy has continued to grow in recent months, with an average of nearly 280 new jobs created monthly. new jobs - it is much more for the growing working-age population to be absorbed by the labor market.

The end of the pay rise cycle is near

Both in the case of an American institution and a European one the end of the cycle is very near. The July hike in the United States and on the Old Continent is almost fully priced in. Now the market will want to know who is closer to the top in this competition. In the US, progress has been made in the fight against inflation, while in Europe, economic concerns are increasingly coming to the fore, as indicated by the latest PMI data.

Recall that after 10 increases in the cost of money (within 15 months), Federal Reserve in June, it decided to pause and left the Fed Funds rate unchanged at 5,25-5,5 percent. Although the decision was unanimous, there were hawkish messages, signaling a broad consensus on the idea of ​​two more interest rate hikes later in the year.

The president of the US bank admitted that the long and varied delays in monetary policy meant that the decision should be interpreted as a slowdown in the pace of rate hikes, and not an actual pause. While inflation is falling, still too high, and the labor market remains very tight, the Fed cannot take any chances premature termination of the entire cycle monetary tightening.

Wage pressure

In the United States, the growth dynamics of consumer prices falls more than in the euro area. Here, the reduction results not only from lower energy and food prices, but also from the weakening of core inflation. For example, unlike in the euro area, the base rate has clearly fallen. In addition, the "super core rate" - the change in services prices excluding rents - based on the consumer price index, which Fed Chairman Powell pointed out a few weeks ago, also fell from 6,5 percent to 2022 percent. in September 4 to below XNUMX%. recently.

Finally, wage pressure a key driver of the "super core" footprobably also reached its peak. The Atlanta Fed's wage measure, which is statistically cleaner than hourly earnings in the employment report, rose 5,6 percent. year on year, which is one percentage point less than a year ago.

Although the pace of inflation decline certainly satisfies the Fed, the result is still far from the central bank's target. As for the real economy, compared to the eurozone, it has done well so far despite an aggressive tightening cycle. On average, the labor market consisted of 280 people. new jobs every month. However, the period is approaching when we will receive more and more signs of a slowdown. If we get a lot of such signals in the following weeks, the July move on rates (up) will probably be the last one, but we cannot exclude, for example, a September pause before a possible next move in November (depending heavily on macro releases).

What will Jerome Powell say?

As far as the first cuts are concerned, the market, in my opinion, is too optimistic about the possibility of rate cuts already in the first quarter, not to mention the end of this year. Rather, Powell will want to make sure that inflation is actually heading towards 2%, so the Fed can keep the cost of money high for a little longer. The president of the bank has repeatedly emphasized the high risk it is too early easing of monetary conditions.

Markets will focus on what Powell announces. Either we will receive a signal of another (or more) increase or a message that further steps will depend on the data. The latter option would be a change of position and could be interpreted as a slight withdrawal of the Fed from further tightening. That would be significant decline in US bond yields and the depreciation of the USD, reflected in the increases of the major currency pair.

Source: Łukasz Zembik, OANDA TMS Brokers