In the last few months, most of the conversations on the stock and currency markets concern the Fed's key rate and the further actions of the US regulator. Recall that the Fed raised the rate twice by 0.75% and may do it for the third time in September. From our point of view, everything will depend on the September inflation report, which will be released a week before the meeting. If it shows a slight decrease in the consumer price index or an increase, the Fed will have to raise the rate again aggressively. Otherwise, the central bank will raise it by 0.5%.
Reuters surveyed leading economists to determine how much the Fed rate could be raised in September. The survey results show that the majority consider a 0.5% rise the most likely scenario. Experts believe that the probability of a recession is growing with each new aggressive tightening, so the Fed will balance fighting inflation and preventing the onset of a recession. Recall that the probability of a recession in the coming year is 45%, and in the next two years – 50%. And in fact, it has already begun; since the last two quarters, the GDP indicator showed a reduction, not growth.
However, the Fed has specific tools for determining a recession, and the fall in GDP alone cannot be considered its beginning. The recession should be accompanied by rising unemployment, falling household incomes, bankruptcies, and a weakening of the labor market, which is not yet observed in the United States. Therefore, we can only deal with a "technical recession." Experts also do not expect a rapid return of inflation to 2%. Most believe it will return to the target level no earlier than mid-2024. And that's a pretty optimistic scenario. As for the rate, most respondents expect it at 3.5% by the end of the year. From our point of view, experts and markets are starting to rejoice prematurely at the decline in inflation. One report, one decline is not an indicator that now it will fall every month. The Fed's rate is not yet high enough for this. It is currently 2.5%, which is considered a neutral level. Recall that some members of the Fed monetary committee have already begun to talk about a higher final rate level, which must be achieved to ensure price stability. We are already talking about 4% or 4.5%. Thus, we believe that the pace of tightening may indeed be slightly reduced, but in general, the rate will continue to rise for at least another six months. It means that stock indices will remain under pressure for another six months, and they will have enough time to update their annual lows. The same applies to the US dollar, which continues to grow against its main competitors. It has plenty of time to strengthen its position further.