Focus on Upcoming Fed Meeting — What to Expect?
On November 2, the world will learn about another decision by the Fed to raise its key rate. Recall that at the moment the key rate in the U.S. is 3.25%, after multiple increases. This has already become a tradition amid rising consumer inflation and fears of economic recession. Nevertheless, the Fed’s upcoming decision again shows the intention to raise the key rate to 4%, by 75 basis points.
Let’s find out what this means for financial markets.
Fed expected to again raise rates by 75 basis points
The Federal Reserve is widely expected to raise its benchmark interest rate by three-quarters of a percentage point for the 4th-meeting in a row on Wednesday.
And after that, markets expect the central bank to come off its hawkish stance to lower inflation and slow down the pace of rate hikes unless data continues to show stubbornly hot inflation.
The majority of economists in the Oct. 17-24 Reuter’s poll also forecast another 50 basis point hike in December, taking the funds rate to 4.25%-4.50% by the end of 2022. That matches the Fed’s “dot plot” median projection.
But once the policy rate reaches what the Fed feels is a sufficiently restrictive level, they would maintain that level for “some time” until there was “compelling” evidence that inflation was on course to return to 2%.
How might markets react to a Fed rate hike?
The Fed’s interest rate hike traditionally affects several assets:
- $US Dollar;
- Dow Jones ($DOW30), Nasdaq ($NAS100) and S&P500 ($SPX500);
- $GOLD.
According to the previous market reaction, as well as basic economic forecasts, an increase in the key rate entails an increase in demand for the national currency (US dollar). This leads to an increase in the US Dollar Index on the foreign exchange market. This is confirmed by the fact that the dollar is currently on top.
However, risky assets such as stocks are suffering from the rate hike. Despite a nice earnings report period and the Dow rising, stock indices are stressed by the Fed’s projected decision.
Among the risky assets is gold, which is also moving to a local low of $1615. A 75 basis point rate hike could trigger an even bigger rally in the USD, pulling the price of gold down and creating a headwind for the rally in indices and stocks.
However, it is important to realize that the Fed’s decision is already embedded in market expectations. Therefore, a 75 basis point rate hike would not cause such a violent reaction. If the Fed is more aggressive, it will trigger a real boom according to our described scenarios.
Summary
- The FOMC is set to implement its fourth straight jumbo rate rise and signal further increases to come.
- An increase in the key rate entails an increase in demand for the national currency (US dollar).
- Risky assets such as stocks are suffering from the rate hike.
- However, it is important to realize that the Fed’s decision is already embedded in market expectations.
