Global markets are awaiting the end of the third US Federal Reserve meeting for this year tomorrow evening, Wednesday, at 6:00 pm GMT, which will coincide with the issuance of the US interest rate decision.
In this context, the markets witnessed many changes that occurred in the American arena. While the talk at the beginning of the year revolved around declining inflation and setting the date for the start of the US interest rate cut, whether in March or June; The tone of decision makers in the United States has changed to a more stringent tone about keeping policy restricted for a longer period and even hinting at the possibility of raising rates again, in addition to ruling out the possibility of cutting rates any time soon.
Therefore, the markets are awaiting the release of the US Federal Reserveâs interest rate decision and the press conference of Central Bank Governor Jerome Powell to obtain any indications or indications regarding the course of the bankâs monetary policy, and specifically, the date of the US interest rate cut, and the strong repercussions this will have on the dollarâs ââmovements in subsequent trading.
However, here the question arises as to whether the cycle of raising interest rates and tightening monetary policy has begun to bear fruit, or does the US Federal Reserve still have more work to do to reduce inflation?
Before answering this question; The most important circumstances that may affect the US Central Bankâs interest rate decision at this meeting must be clarified, and they can be addressed in the following points:
First: The economic conditions in the United States
The United States witnessed many economic changes during the first quarter of the year, which will clearly affect the upcoming decisions of the US Federal Reserve. Inflation, economic growth, and labor market data were the most important economic influences that occurred on the American scene:
Economic growth: The United States was able to achieve economic growth of 3.4% by the end of the fourth quarter of 2024, better than expectations that expected the economy to grow by only about 3.2%, and this coincided with an increase in retail sales within the United States by 1.1% for the month of March, as expected. Markets grew by only 0.5%.
These positive data raised optimism in the markets about the strength of US economic activity amid the tightening monetary environment, and many decision makers in the United States drew attention to the strength of the country's economic performance as a strong factor for continuing the tightening approach.
Inflation rate: The acceleration in inflation growth in January and February was not just exceptional data; Rather, it is a real problem facing the economy and the US Federal Reserve, as inflationary pressures have reignited, and this was clearly demonstrated in the inflation data for March, which revealed the growth of the annual consumer price index in the United States by 3.5% from 3.2% in February, and the reading was also higher. According to market expectations, annual inflation will grow to only 3.4%.
During the month of March, the personal consumption expenditure index (the Federal Reserve's preferred inflation indicator) achieved growth of 2.7% from 2.5% last February, reflecting increasing inflationary pressures during that period.
Labor Market: Official data revealed that the US economy added about 303,000 jobs, up from 270,000 jobs in February, and the March reading was higher than market expectations, which indicated that the economy added about 200,000 jobs, which reflects the increase in consumer spending and its impact on rising demand. Consequently, prices rose, and at the same time, average hourly wages rose by 0.3% on a monthly basis during last March after the index achieved a growth of 0.2% during last February.
From the previous presentation of the recent economic variables, it appears that the US Federal Reserveâs battle to curb inflation is not over yet, and in light of the acceleration of inflation growth and the continued strength of conditions in the labor market (one of the fuels of inflation in the United States); It can be said that the US Federal Reserve will maintain high interest rates at this meeting, especially since the country's economic performance is considered a major support for making this decision.
Second: The expectations of major investment banks regarding the US Federal Reserveâs decision
After most expectations supported the start of interest cuts in the United States at the June meeting; Recent monetary policy makers' statements and economic data have changed estimates; Where expectations have become widely mixed; While some ruled out the possibility of a US interest rate cut this year, others suggested a rate cut in late 2024, and it even reached the point of emerging new expectations to raise rates again.
In this regard, the most prominent of these expectations for a number of major banks can be discussed as follows:
1- Not reducing interest rates this year
JP Morgan suggested that the US Federal Reserve may keep interest rates at high levels for a much longer period than markets believe. In other words, the US Federal Reserve may not cut interest rates at its June meeting, as the US bank ruled out cutting interest rates this year, if inflation does not decline. , stressing that the Federal Reserve is not in a rush.
Société Générale largely agreed with JP Morgan, predicting that the US Federal Reserve does not yet have full confidence to declare victory in the battle to curb high inflation, given that the consumer price index rose significantly in the first months of 2024 compared to the last half of the previous year.
2- Reducing interest rates in the second half of this year
Commerzbank expects the US Federal Reserve to cut interest rates three times later in the year, and to maintain high interest rates in the near term. In addition, the famous Swiss bank UBS (UBS) expects that the US Federal Reserve will cut Interest rates will rise three times this year, by 25 basis points in June, September and December 2024.
Also, the British bank Barclays expected that the Federal Reserve may be more stringent regarding its monetary approach during the upcoming meetings, and maintain its tightening position for a longer period of time, suggesting the possibility that the US Federal Reserve will cut interest rates only once this year, late in September or December.
Third: Statements of monetary policy makers in the United States
The tone of members of the US Federal Reserve has been more stringent during the recent period, specifically since the last meeting of the central bank, affected by negative developments and faltering progress in the battle to control inflation in the United States, which prompted some to hint at the possibility of raising interest rates again.
In this context, Goolsbee stated that raising interest rates is one of the possibilities on the table at the upcoming US Federal Reserve meetings, as the central bank has not yet succeeded in achieving its inflation target. US Federal Reserve Deputy Governor John Williams also hinted that if economic data forces the US Federal Reserve to raise rates interest rate again, the bank will do so, ruling out reducing interest any time soon, and it also made clear that the Federal Reserve still has more work to do to reduce inflation.
In addition, Neel Kashkari said that the US Federal Reserve should not rush to take the decision to reduce US interest rates, suggesting that the interest rate cut would begin sometime next year, while the best possibilities were for the US Federal Reserve to maintain high interest rates until... The end of the year, according to Bostic's statements, which stated that in its entirety the data indicates that the path towards achieving the 2% inflation target will be slower than many believe.
The statements of US Federal Reserve Governor Jerome Powell came to reinforce expectations that the tightening approach to monetary policy will continue for a longer period. Powell stated that the recently released economic data showed that no significant progress has been made regarding the battle to curb inflation during this year, indicating that if inflation continues to rise and resists decline; The central bank can keep interest rates at high levels for a longer period whenever necessary.
Finally: the expected scenarios for the upcoming US Federal Reserve decision
From the previous presentation, it can be said that there are several possible scenarios for the Federal Reserveâs decision and its effects on the dollarâs ââmovements in the currency market, which are as follows:
The first scenario: stabilizing the key interest rate at the range (5.25%-5.50%), indicating the re-igniting of inflationary pressures and increasing upward risks to price levels, ruling out the possibility of an interest rate cut anytime soon, and also indicating continued labor market pressures. And that the battle to curb inflation is not over yet, in addition to emphasizing that the US Federal Reserve still has a lot of work to do to bring inflation back towards the target, and if this scenario is achieved, it is likely that the US dollar will rise against competing currencies.
The second scenario: It revolves around keeping interest rates at their current levels, while hinting that the data for the first months of this year are exceptional data, in addition to the imminent end of the bankâs tightening approach and the start of reducing the US interest rate. If this scenario occurs, the US dollar may witness movements. Strong bearishness in trading subsequent to the issuance of the decision.
Source: Arab Trader.
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