Will Wednesday's Fed's decision shake asset prices?

The market consensus assumes that on Wednesday (May 4) the US Federal Reserve will raise interest rates by 0,5 percentage point If these estimates are correct, it will be the largest hike in 22 years.

In the coronavirus pandemic, the Federal Reserve, like most central banks in the world, tried to support the economy by facilitating access to the so-called cheap money.

Yesterday it was profitable to buy for dollars

Interest rates seemed to be record lows at the time, and almost anyone who wished could borrow dollars on very favorable terms. Using cheap loans, investors could then buy various types of assets, because financing the transaction with US currency seemed then easy, fast and cheap.

In the face of a market filled with cheap dollar, other investor's assets could gain in value. American stock exchanges broke all time records. However, not only shares became more expensive, but also kryptowaluty.

Today, selling for dollars may turn out to be profitable

With the pandemic in retreat, financial markets began to get used to the idea that the US dollar would soon become more expensive and less accessible. A few months ago, the Federal Reserve announced a departure from lenient financial policy. In March this year. started a cycle of interest rate increases. May 4 in response to the huge inflation, which in the US is 7%, the Fed may raise interest rates by as much as 50 basis points.

Does a shift in the US central bank's stance mean the dollar will attract a lot of capital? If - in line with market expectations - the level of interest rates reaches 3-3,5% at the end of the cycle of increases, there may be many more people willing to hold deposits in USD or American bonds than before.

While in a pandemic, investors could buy for dollars, now they can sell assets, returning to the USD and counting on its higher interest rate.

Has the rate hike already been priced in?

Certain tendencies can already be observed, among others on exchanges and the cryptocurrency market. From the beginning of the year to today, the Nasdaq 100 index has fallen by more than 20 percent, 12 percent. he lost S&P 500 index, bitcoin went down by 16,5 percent, ethereum by 23 percent. And the Fed has not, in fact, even started a real and aggressive cycle of rate hikes.

This may lead to the conclusion that the markets have already factored in the rise in US interest rates in the valuation of individual assets. Is it really so? We can find out the answer on Wednesday evening.