The central bank is expected to raise rates by half a point. Investors are wondering if this will be even more aggressive

Jerome Powell, Chairman of the U.S. Federal Reserve Board, speaks during the Senate Bank Housing and Urban Affairs Committee’s Recommendation hearing on January 11, 2022, in Capitol Hill, Washington.

Graeme Jennings | Reuters

It is widely expected that the Federal Reserve will raise its nutrient fund target to half a percentage point on Wednesday, but investors will focus more on signaling that it may be even more aggressive with future rate hikes.

Beginning in June, the central bank is expected to announce the launch of a plan to reduce its approximate $ 9 trillion balance sheet to $ 95 billion a month. The 50-point increase would put the Fed Funds’ target rate range of 0.75% to 1%.

The target ratio of those nutrient funds will be zero after this week’s hike, but the financial ratio above 2.8% by the end of this year will be lower than market expectations.

While some economic data is slowing while inflation is still hot, central bank communications will be crucial. Economic growth slowed to 1.4% in the first quarter. But economists say it was distorted by trade data and they expect GDP to rebound in the second quarter.

“I think they’re going to be 50 [basis points], And they seem to have died to hiking rates to the point of reducing inflation, “said Jim Karen, chief sustainable strategist at the Global Fixed Earnings Group on Morgan Stanley Investment Management.” But that’s the real debate. Are they trying to target inflation by 2024? If they were, wage inflation would be much higher and require more austerity than the central bank puts forward. “

Powell’s ideas are front and center

The central bank’s forecast shows that it expects The main personal consumption costs are inflation Reach 2.3% by 2024 and return to the central bank’s target of 2% in the long run. Federal Reserve officials in their March forecasts forecast a Fed Fund rate of 1.9% for this year and 2.8% for 2023 and 2024. The central bank’s forecast for the financial year 2023 was between 2.4% and 3.1%.

The central bank did not release its next quarter forecast until the June meeting, so what the market depends on will come from central bank chairman Jerome Powell. Powell explains to the media following the release of the ET report in the afternoon 2.

The futures market is projected to have a fund fund ratio of 2.82% by the end of this year, which will take up about 2.5% hiking points by 2022. Traders are betting on a 50 basis point rise this week, as well as 50 or more for each of the next three meetings in June, July and September.

St. Louis Federal Reserve

“The cross-wind is very hard. I think the fundamental question is clear. How fast will inflation ease or will the central bank accelerate austerity in the next four to five months?” Said Michael Schumacher of Wells Fargo.

Consumer price inflation rose to 8.5%n March. Although economists say inflation will remain high, how quickly it falls is crucial to the central bank’s rate trajectory.

“Looking at the central bank situation, I have to say that inflation has come down and is declining. Is it declining fast enough?” Schumacher said.

“A lot of policymakers say they want to reach neutrality by the end of this year – 2.50% more, and the market should be above the central bank’s neutral – 3.30% in the middle of next year. It’s very low. Added.

The next steps of the central bank will become the focal point

Strategists say markets are bracing for a hawk central bank. However, it could be considered worse if the central bank delivers what it expects without emphasizing a more aggressive march. That is, bond yields, which move the opposite price, may decline after the meeting and stocks may move higher.

“The market is really going to focus on the outlook for growth and especially the potential of 75 basis points,” said Mark Cabana, head of Bank of America’s US Strategy Strategy. Traders have been speculating that the central bank may leave the June meeting with even bigger tariff hikes.

According to JPMorgan’s economists, the Fed is likely to raise rates by 75 basis points this week, 1 out of 5, although the market has not priced that possibility.

While the central bank is not expected to provide much clarity on the pace of its march, Powell may ask about it during his conference.

“He’s not going to support or reject 75,” Cabana said. When the Fed raises rates by a quarter point, the chairman will follow the script of the last meeting. This is the first increase after 2018.

“We think he’s going to try to be as insecure as possible, just like how he sounded last time,” Cabana said.

Communication intention

Rick Ryder, BlackRock’s chief executive of global fixed incomes, said he expects the central bank to raise rates by half a percentage point on Wednesday, but may accelerate its rise if it realizes the need for the central bank to get it at some point in the future. Fast to neutral.

If the central bank makes its intention clear, markets will tighten quickly. “They can accelerate and go faster, and then they can highlight,” he said.

Since the last meeting, the outlook for the economy has deteriorated and markets have thrown up a rage. Federal Reserve officials have been very outspoken about their commitment to combat inflation with rate hikes. Increased fears of an economic downturn in the markets.

Ryder said he did not expect a recession this year because the economy is so strong. “I don’t think we’re going to go into any short-term recession. The data are still solid,” he said. But Ryder said it is slow, and that a recession could occur in 2023. “I think any recession we see in the next two years will be shallow without an external shock.”

The S&P 500 Bond yields were down 8.8% in April. The 10 year treasury Yield success a Over 3% this week, Was up 1.66% in the week leading up to the central bank meeting last March. The 10th year Tuesday was 2.95%.

Strategists The central bank is not worried about the increase in stock market sales or bond earnings. “They want to tighten financial conditions. That’s part of the story,” Cabana said. He expects Powell to say that tightening is not unexpected.

“He would say the economy is still strong and it is important for the central bank to adjust prices again,” Cabana said. While the market is skeptical, Powell is also likely to stress that the Fed is seeing a soft downturn to the economy, he added.

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