What will the Fed do? The market awaits the decision of the US central bank

The highlight of Wednesday, all week and June is the American meeting Federal Reserve. The market knows that US interest rates will increase, but does not know exactly by how much. He also does not know how hawkish Jerome Powell will sound at the press conference after today's meeting. These two elements will determine what moods will dominate the markets in the coming days and weeks.

The market is waiting for rate hikes

On Wednesday EUR / USD exchange rate after a morningshot up shot fueled by an unplanned meeting ECB, returned to the area around Tuesday closings. The return “fueled” expectations for an interest rate hike in the US.

For the same reason, it continues to decline bitcoin, going down to the region of $ 20000 today. And only the US500 corrects the last 5 bearish sessions, which can be seen as a precautionary short-term profit taking ahead of the Fed meeting.

Daily chart EUR / USD. Source: Tickmill

US500 Daily Chart (S&P 500 CFDs). Source: Tickmill

BTC / USD daily chart. Source: Tickmill

What will the Fed do?

Today's Fed meeting is of key importance for the markets. The moods will depend on the decisions made by the Fed, and above all on how the path of further changes in the monetary policy in the US will be outlined. It is likely today that the stock markets will continue to plunge into the bear market, the dollar will be even stronger, debt yields will climb higher, and the escape from cryptocurrency markets will continue.

Powell and the rest of the Fed members have a hard time to crack. Last week, the markets were convinced that the Fed in June would raise interest rates by 50 basis points, as it did in May, and finally in this cycle the federal funds rate will rise to 3-3,2 percent. from 0,75-1,00 percent Nowadays.

The problem is the rapid rise in inflation

However, the surprising spike in consumer inflation in May to levels unseen in the US for over 40 years turned those expectations. Economists for the races began to increase their forecasts as to the scale of the increase. Now most of them assume that US interest rates will increase by 75 basis points in June. If this had happened, it would have been the first hike on this scale since 1994. 

Initially, it can be assumed that if the Fed raises interest rates by 75 bp in line with market forecasts, then such a decision will be accompanied by a strong suggestion that it is only a one-off action forced by the need of the moment. Therefore, initially the rate hike may shock the markets, but eventually it may lead to an improvement in moods.

The situation is much simpler in the case of 50 bp traffic. After a large number of investors referred it to the past, such a decision would be a positive surprise. This would support stock exchanges in the short term, lower yields on debt and weaken the dollar. However, it would not do the fear of inflation. Markets may still be afraid that rate hikes will accelerate, so the fear of higher rates could return in a few days.