OPINION
Market Rating Before FOMC MeetingJan 31
FOMC Members Meet for 75 Bp Rate Increase
Over market forecasts for a 50 basis point hike in interest rates, the FOMC increased its federal fund's target during its meeting on June 14–15 to a range of 1.50–1.75 percent with a 75 basis point tightening, the greatest scale in 28 years. However, the Committee, in its Economic Projections Report, predicted that interest rates would be at the level of 3.4 percent by the end of the year, pointing to a further tightening of 175 basis points.
Since the US Federal Reserve's (FED) June meeting, the outlook for the US economy has weakened a little more, as evidenced by high-frequency data. In particular, the fact that the services purchasing managers index (PMI) reported by Manhattan-based financial information provider S&P Global Inc. for July pointed to the first contraction since 2020, signaling that a negative Gross Domestic Product (GDP) may be seen in the second quarter.
This could further raise the temperature of recession discussions for the US economy, which has already shrunk 1.6 percent in the first quarter. And this may force Fed Chairman Powell to be less optimistic about the growth outlook and labor market conditions at his press conference today. But Powell will need to contain speculation about a 100 basis point rate hike, with headline inflation soaring to 9.1 percent in June.
On the other hand, if Powell can convince the markets enough of the Committee's willingness to control inflation without suffocating the economy, he can rebound the short-term yield curve (2 - 10y) that has slumped into negative territory and alleviate some of the recent strong dollar pressure on international assets. On the other hand, Powell's clear message that they will protect the aggressive tightening path by relying on labor market conditions may contribute to the stressful atmosphere in the markets.
