The US Federal Reserve (Fed) is preparing to raise interest rates by 75 basis points for the second consecutive meeting. This is at least what the market expects, which understands that the American institution must press on the accelerator before starting to lower its rates in the second half of 2023.
This will be the fourth meeting this year where the US central bank has raised rates. And he did it at an ever faster pace. The increase achieved in March was 25 basis points, while that of May already reached 50.
He stepped on the accelerator even more in June, when he raised the price of silver by 75 basis points for the first time since 1994. Although the forecasts indicate an increase in the same proportion, a 100 basis point hike is on the table.
If these much more aggressive forecasts materialize, Wednesday’s would be the Fed’s biggest rate hike since 1984, when Paul Volcker was in charge. On this occasion, the 1% increase served to bring the price of silver to 10.5%.
If, as expected, the Fed executes another 75 basis point hike, the institution will carry interest rates within the range of 2.25%/2.50% from 1.5%/1.75% current. The price of silver in the United States will reach levels not seen since 2008.
At the time, the US central bank was in the midst of a rate-cutting cycle that lasted from mid-2006 to late 2015, when it raised rates again.
Over the next 24 months, between December 2015 and the same month in 2018, the Fed raised rates by 250 basis points. The US central bank is now involved in a similar rate hike cycle in quantity but at a much faster pace.
On this occasion, the institution raised the rates at nine different meetings. Now he’s done it in just four dates to curb inflation, which in the United States reached 9.1% in interannual rate in June. Price increases had not reached this level since 1981.
Inflationary pressure has increased over the past three months – from 8.3% in April to 8.6% in May and 9.1% in June – clearly showing that, at least so far, the price increase did not peak in the United States.
[El IPC récord de EEUU obliga a los bancos centrales a subir aún más el precio del dinero]
Even the underlying rate didn’t, the one that doesn’t factor in energy or food, as they’re considered the most volatile elements. It reached 5.9% in June compared to the year.
“Faced with inflation that continues to surprise on the upside – and even risks settling – the Fed must continue to act quickly and forcefully and deploy as many rate hikes as possible before the expected economic downturn occurs“, indicate the analysts of Allianz Global Investors.
Downgrades in 2023
Although inflation is still far from the 2% target set by the Fed itself, the market expects the institution to begin to slow down as early as September. Forecasts indicate that the US central bank will return to the 50 basis point path.
Most experts believe that the Fed will start cutting rates from mid-2023. This is what analysts at Nomura think, for example. At the Japanese bank, they calculate that rates in the United States will peak between 3.5% and 3.75% in February next year.
After a few months at this level, they expect the Fed to cut them by 25 basis points at the September 2023 meeting. At that time, the bank will also end the liquidation of its balance sheet to prevent monetary policy tools from working the other way, they predict.
Thus, the market expects the Fed to undertake the last major rate hike of this bull cycle on Wednesday. It will be a day before it is known the first reading of US gross domestic product (GDP) for the second quarter of the year.
The country could have already entered technical recession, a concept that indicates negative growth for two consecutive quarters. Already between January and March, the US economy contracted by 0.4% compared to the previous three months. The drop was 1.6% compared to the same period of the previous year.
“The Fed is aware that in return for the priority of controlling inflation, it will have to tolerate a greater economic slowdown and an impact on employment”, underline the analysts of Renta 4. The question -they ask themselves -“will be if it achieves its soft landing objective and the economy is not slowing more than expected.
[La subida de los precios en EEUU y la UE por encima de lo previsto acerca la amenaza de la recesión mundial]
At manager MFS Investment Management, they believe that “it is still unclear whether the US economy will manage to avoid a ‘hard landing’. These experts point out that the probability of a recession in the United States “has increased a lot”reflecting concerns about the threat of excessive monetary policy easing by the Fed.