Friday 2 December 2022

Fed remains focused on inflation, more rate hikes seen

DUBAI, September 22, 2022

By Naeem Aslam
Market players are still in the process of digesting the message from the Federal Reserve, which sent the US markets lower once again yesterday. 
The markets expected the decision of an interest rate hike by 75 basis points, and there was no element of surprise. However, it was Jerome Powell’s speech that brought large whipsaws to the US equity markets. 
The Fed made it clear once again that they are determined to do whatever it takes to control inflation. Market players should not make any mistake in thinking that future interest rate hikes will not be of the same magnitude, especially the one in November. 
It is pretty much a done deal that the Fed will increase the rate by another 75 basis points in November and 50 basis points in December.
The reason that US stock is under pressure is that traders believe that the possibility of a recession taking place in the US is strongly on the cards. In fact, many believe that the Fed is actually looking for a recession, given how aggressive they are with their monetary policy. However, the Fed did say last night that their monetary policy is very much determined by the economic numbers. But at the same time, they have already covered their back by adding that they are expecting some weakness crawling back in the labour market. 
In simple terms, the message was that the next month’s data and the number after that may show that the US labour is slowing down. This particular factor isn’t going to change their strategy as they will still not only continue to increase rates, but in fact, the interest rates are likely to stay there for a while.
What was also quite interesting to note in the Fed’s speech last was that the Fed wants to see some correction in the housing market. It believes that the current growth in the housing market is overdone, and it needs a correction. This leads many to think that the housing market in the US is now in for a rough winter and possibly the months after that as well. As most parts of the US have an interest rate above 5% now, the US housing market is likely to see a sharp decline in its numbers.
All eyes will be on the BOE today as the bank will announce its monetary policy decision. The range of interest rate, which is expected by traders, is between 50 to 75 basis points. An interest rate hike of 50 basis points will be considered a dovish interest rate hike, and an interest rate hike of 75 basis points will be deemed as a hawkish interest rate hike.
We think the bank is going to press a button today, which it hasn’t done since 1989, and that is an interest hike of 75 basis points. The reason is that the BOE has very limited options in terms of what it can do. By delaying their monetary policy decision by another week due to the death of Queen Elizabeth II, the bank had the opportunity to fathom completely the monetary policy decision of the Fed, which is influencing the dollar index. 
In addition to increasing the interest rate, the bank is also expected to confirm plans to sell more of the £895 billion of bond holdings—in simple terms reversing further elements of dovish monetary policy.
In terms of gold prices, traders are more focused on what is going on with the dollar index. The fact is that the index is on fire, and that is taking the shine away from the precious metal. We did see the prices moving lower last night, and that is likely to be the trend for gold prices today as well. But at the same, the sell-off hasn’t been that intense for gold prices, and the reason for that is that many speculators have been preparing themselves for an interest rate hike of a full percentage point by the Fed, which didn’t materialise last night.
For now, the path of the least resistance for gold prices is highly skewed to the downside. The upcoming weekly jobless numbers are likely to bring higher volatility for gold prices. But no mistakes, the Fed has already indicated the US labour market will experience weakness, but that isn’t going to deter the Fed’s current monetary policy stance. -TradeArabia News Service
* Naeem Aslam is Chief Market Analyst at Avatrade


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