By Alessandro Albano
Investing.com – The Federal Reserve Operating Commission will announce its latest monetary policy decision tonight at 20:00 CEST, with market expectations set for a 75bp interest rate hike, which would lead to the new interest rate range from 2.25% -2.50% to the new 3% -3.25%.
According to the futures on fed funds measured by Investing.com’s fed rate monitor, the probability of a maximum increase of a full percentage point stands at 15%, while +75bps are expected to be 85%
With the ‘jumbo’ rise practically discounted, investors will also pay attention to the likely very hawkish tones in the press release and Governor Powell’s next press conference, and will also keep an eye on the new economic projections and dotplot chart.
“We believe that the decision to raise the cost of money by 75 basis points is consistent with the macroeconomic data published”, writes Filippo Diodovich, Senior Market Strategist of IG Italia, in a note, as consumer inflation expectations “have decreased significantly. “despite an increase beyond expectations in August (+ 8.3% y / y).
According to the strategist, “there is therefore no reason to overreact, taking into account that the effects on the real economy of central bank decisions can be seen after many quarters, but on the financial markets the impact is immediate and a disproportionate choice. compared to the trend of macro data could lead to a certain financial instability “.
However, the decision to raise by 75 basis points does not diminish the Fed’s commitment to tackle inflationary pressures. IG believes, in fact, that the tones used by Powell at the press conference “will be very hawkish”, while in the economic projections the Fed economists “will revise down the estimates on real growth and will instead make an upward revision on the outlook for inflation”.
As regards the expectations on policymakers ‘rates, the so-called dotplots, according to Diodovich, bankers’ expectations at the end of the year “will have totally changed”.
“In June the median of central bankers expected a level of the cost of money at the end of 2022 in the range 3.25% -3.50%. We believe that the median will rise in the range 4% -4.25% which would imply an increase of another 100 basis points between the November and December meetings “, says the expert.
Impact on the market
According to IG, in the very short term equity markets could “also react positively for having avoided the danger of a monstrous 100 basis point hike”.
However, the manager maintains the outlook “bearish on indices and bullish on the dollar in the medium / short term in the belief that the Fed will continue to engage in aggressively tackling inflation with rates above 4% at the end of the year”.