Penultimate rate hike in the US? The Fed did not surprise the market

FED raised the basic interest rate by 0,25 pp. The market expected such a decision, just as it expects one more rate hike in March, which will probably be followed by the end of the cycle. Then, at the turn of 2023 and 2024, rates should start to fall. The end of the hike cycle is a chance for the stock exchanges to end the slump and calmly rebuild valuations.

The Fed's decision came as no surprise

The FED did not surprise the market by raising interest rates again. The current cycle of increases, which began in March 2022, has brought the fastest and most aggressive growth in the US since the 80s. After an increase of 0,25 pp. in March and 0,50 p.p. in April 2022, there were as many as four increases of 0,75 pp. Now, however, the strength of the increases is weakening along with the fall in inflation and the effectiveness of previous interest rate increases. In December, the FED raised rates by 0,50 pp, and today only by 0,25 pp. The market predicts that we are only one minimum hike of 0,25pp from the end of the cycle. in March.

In this way, the cycle will end and there will be a market upheaval. Then we will wait for the first rate cuts, which, depending on the progress in lowering inflation, may take place at the end of 2023 or rather in the first half of 2024.

The IMF forecasts no recession in the US

The end of the series of interest rate hikes in the US is a chance for the markets to get out of the bear market and rebuild calmly. We anticipate that this process will take place gradually. This should lead to an improvement in the valuation of many companies, with a simultaneous decline in profits and deterioration in financial results (which we are already seeing, but on a smaller scale than we expected). This will be the effect of the economic slowdown. However, new forecasts show that the slowdown will not be as strong as previously expected. According to the latest forecast MFW extension The U.S. economy is expected to grow 1,4% this year, down from 1% growth forecast in October. This may mean that the US can even avoid a recession 2023 w roku.

Good GDP data for QXNUMX, as well as the situation on the labor market, theoretically allow for more than one more rate hike. Jerome Powell has said several times that he will be better able to deal with a situation where rates are raised too far in relation to the need to cool the economy than if he had fight inflation due to insufficient foot growth. However, inflation is also falling and amounted to 6,5% in December. y/y Therefore, if inflation does not stop falling, we will see the last rate hike in the US in March.

Today we will also see rate hikes in the euro and UK heap. EBC i Bank of England will most likely decide to increase the rate by 0,50 pp.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.