OPINION
Market Rating Before FOMC MeetingJan 31
US Federal Reserve is highly likely to increase the rates by 50 bps again
The Federal Open Market Committee (FOMC) will conclude its meeting on June 14-15 at 20:00 (GMT+2) tomorrow. Markets predict that the Fed will raise its federal funds target by 50 basis points to the range of 1.25 – 1.50 percent, maintaining its strong monetary tightening momentum.
In March, FOMC officially entered the monetary tightening cycle with a 25 basis point interest rate hike for the first time since November 2018. In the subsequent May meeting, Fed made the largest-scale rate hike since 2000, with an increase of 50 basis points, and updated the federal funds target as 0.75 - 1.00 percent. The Committee stated that as of June 1, the balance sheet reduction process, which will start with $ 30 billion per month in treasury papers and $ 47.5 billion in mortgage-backed securities, will double after the first 3 months and will continue at $ 95 billion.
However, inflation pressures are quite strong in the world's largest economy due to the fact that the FOMC is hesitant to end monetary incentives in order to assess pandemic-related supply bottlenecks and the effects of the war in Ukraine.
Consumer price index (CPI) rose by 1.0 percent to a 41-year peak of 8.6 percent year-over-year, the U.S. Department of Labor reported on Friday. During this period, Core CPI increased by 0.6 percent monthly and 6.0 percent annually, indicating that upward risks were maintained in the inflation outlook.
At the June meeting, which will be completed tomorrow at 20:00, the FOMC is expected to tighten monetary policy by another 50 basis points in order to ensure inflation, which is at the peak of 41 years, does not become permanent. At this point, the Committee is expected to aim to reduce the upward risks in the inflation outlook by both controlling the strong domestic demand and cool the commodity markets down.
On the other hand, Economic projections of Federal Reserve Board, which it will publish in parallel with the meeting decision, will also be on the radar of the markets. The growth and inflation projections of the Committee members are quite significant in the report. If the members project a growth and inflation revision making the gap between those two factors larger, recession concerns will be ignited. In addition, interest rate projections of the members for the end of the year and next year will also be decisive in asset prices.
Then, there will be a press conference at 20:30. FED Chair Powell may maintain his hawkish stance in an attempt to control expectations. In addition, Powell is expected to give tips on whether to be more aggressive in the following period in narrowing $8.9 trillion balance sheet, which will double in about 3 months. Signals regarding the tightening pace in July and September meetings will also be very important for the markets.
It is necessary to emphasize that the expectations that the Fed will raise rates by 50 basis points in the next two meetings are fully priced in the markets. Proceeding from this, Powell's signal of 50 basis points for the next meeting may ease the pressure on the dollar, developed country currencies and risk-sensitive assets. However, the opening of the 75 basis point tightening room for any of the next 3 meetings could severely weaken financial assets via long-term US treasury yields.
In March, FOMC officially entered the monetary tightening cycle with a 25 basis point interest rate hike for the first time since November 2018. In the subsequent May meeting, Fed made the largest-scale rate hike since 2000, with an increase of 50 basis points, and updated the federal funds target as 0.75 - 1.00 percent. The Committee stated that as of June 1, the balance sheet reduction process, which will start with $ 30 billion per month in treasury papers and $ 47.5 billion in mortgage-backed securities, will double after the first 3 months and will continue at $ 95 billion.
However, inflation pressures are quite strong in the world's largest economy due to the fact that the FOMC is hesitant to end monetary incentives in order to assess pandemic-related supply bottlenecks and the effects of the war in Ukraine.
Consumer price index (CPI) rose by 1.0 percent to a 41-year peak of 8.6 percent year-over-year, the U.S. Department of Labor reported on Friday. During this period, Core CPI increased by 0.6 percent monthly and 6.0 percent annually, indicating that upward risks were maintained in the inflation outlook.
At the June meeting, which will be completed tomorrow at 20:00, the FOMC is expected to tighten monetary policy by another 50 basis points in order to ensure inflation, which is at the peak of 41 years, does not become permanent. At this point, the Committee is expected to aim to reduce the upward risks in the inflation outlook by both controlling the strong domestic demand and cool the commodity markets down.
On the other hand, Economic projections of Federal Reserve Board, which it will publish in parallel with the meeting decision, will also be on the radar of the markets. The growth and inflation projections of the Committee members are quite significant in the report. If the members project a growth and inflation revision making the gap between those two factors larger, recession concerns will be ignited. In addition, interest rate projections of the members for the end of the year and next year will also be decisive in asset prices.
Then, there will be a press conference at 20:30. FED Chair Powell may maintain his hawkish stance in an attempt to control expectations. In addition, Powell is expected to give tips on whether to be more aggressive in the following period in narrowing $8.9 trillion balance sheet, which will double in about 3 months. Signals regarding the tightening pace in July and September meetings will also be very important for the markets.
It is necessary to emphasize that the expectations that the Fed will raise rates by 50 basis points in the next two meetings are fully priced in the markets. Proceeding from this, Powell's signal of 50 basis points for the next meeting may ease the pressure on the dollar, developed country currencies and risk-sensitive assets. However, the opening of the 75 basis point tightening room for any of the next 3 meetings could severely weaken financial assets via long-term US treasury yields.
