Although markets had hoped the Fed would pause from raising rates in September, that hope was dashed by recent statements by officials, including its number two, Lael Brainard.
(Boursier.com) – As the Fed’s next meeting on monetary policy approaches, June 14 and 15, markets are speculating on the scale and duration of the monetary tightening cycle that the US Federal Reserve has begun to fight. inflation. Investors fear that too aggressive a policy could lead to a recession in the US economy.
Although markets had hoped the Fed would pause to raise rates in September, that hope was dashed by recent statements by Fed officials reaffirming their desire to continue rising at half-and-a-half until inflation shows real signs of slowing.
“It’s hard to justify a break in September,” Brainard said
Therefore, the slight drop in price increases observed in the US in April (+ 8.3% after + 8.5% in March) was not enough to change the very “hawkish” tone of Fed officials. Thursday, Vice President Lael Brainard says she supports raising interest rates by half a point in June and Julyor even in September, if inflation, which she called “the number one challenge,” does not subside.
“Now it is very difficult to see an excuse for a break (at a meeting in September). We still have a lot of work to do to bring inflation back to our 2% target, ”the number two Fed told CNBC.
“Market expectations of likely growth of 50 basis points in June and July, given the data we have today, seem a reasonable trajectory,” she told CNBC. “September is less clear,” she added. “But if we do not see a slowdown in monthly inflation, if we do not see that some of this really high (price) growth began to decline slightly, then it may be appropriate to hold another meeting, where we continue (until increase) in the same pace, “she explained.
The Fed’s policy is based on inflation indicators
on his side, Cleveland Fed President Loretta Mesterstressed on Thursday that raising the rate in September will depend on inflation: if it shows a clear slowdown, “the rate of increase may also slow down”, but if not, “faster rates may be needed.”
Ms. Mester, a member of the Monetary Committee (the Fed’s decision-making body) with the right to vote in 2022, added that “the risk of recession has increased, but as demand and labor demand are strong, (…) a sudden slowdown can be avoided.” .
Monday, Fed Governor Christopher Waller also question the pause in September, arguing in favor of raising the rate by half a point for “several meetings” until inflation returns “substantially” closer to normal. The Fed’s target is 2%.
All these statements have somewhat weakened the hopes of financial markets that the Fed will take a break from its growth cycle in September. Hope that supported a sharp recovery of about 6% on Wall Street last week.
Rates above 2.5% at the end of the year?
Therefore, futures markets are now preparing for three rather than two half-point increases in June and July, as well as in September, before considering a pause or slowdown by the Fed … After increasing by a quarter point in March and a half-point in April , Fed rate now ranges from 0.75% to 1%. Thus, it may be increased to 2.25% -2.5% as of September 20 and 21, if the Fed continues three consecutive reinforcements by half a point. This level is considered “neutral” for the economy, but the Fed has warned that it will rise if inflation does not slow down quickly enough, leading to fears of a recession in the stock markets.
In addition to the Fed’s expected rate hikes, which could raise the Fed’s rate above 2.5% by the end of 2022, financial markets will have to digest the Fed’s second monetary tightening measure, namely a 9,000 bailout billion dollars after its large-scale QE (asset purchase) programs during the Covid-19 crisis. As announced at the April meeting, the central bank began cutting that balance on Wednesday, June 1, at a rate that will reach $ 95 billion a month from August.
In US bond markets, the yield of sovereign states has risen sharply since the beginning of the week. Implementation T-Bond in 10 years fell 2.90% on Thursday night against 2.74% last Friday, while the pace T-Bond for 2 years was unchanged at 2.64%, down from 2.48% on Friday.