FED The U.S. is battling a record for 40 years of inflation. So far, inflation is winning.
Rate decision
15 June Fed - Federal Reserve, which performs the functions of the Central Bank, — raised the interest rate by 75 basis points. One basis point — 0,01%. The bet range is now 1.5-1.75%.
The regulator held an increase for the third time in 2022. So he wants to overcome the high level of inflation.: in May, the CPI consumer price index rose by huge for the US 8,6%.
Higher rates will make loans more expensive. As a result, consumers will spend less and save more. After a while, this should slow down the growth of prices for goods and services..
According to the regulator, the main causes of inflation are quarantine in China, which leads to supply disruptions and an imbalance of supply and demand, and the conflict in Ukraine, which accelerates the price of raw materials.
Fed Forecast
The regulator once again updated expectations for 2022. He considers, that the PCE personal consumption price index is analogous to the CPI, by which the Fed measures the inflation rate, — by the end of the year it will grow by 5,2%. And the rate range is up to 3.25-3.5%.
Also, the Fed expects, that in 2023 inflation will slow to 2,6%, and the rate will rise to 3.75-4%. In 2024, the rate is planned to be lowered.
Such forecasts should be treated with caution.: no one knows, what will be the situation in the economy in a month, not to mention the longer distance.
For comparison: just six months ago, the regulator expected inflation in 2022 at the level of 2,6%, rate — 0,75—1%. Possible, that in the future the forecast will be revised again.
How the Fed's forecast for 2022 changed
| December 2021 | March 2022 | June 2022 | |
|---|---|---|---|
| GDP | 4,0% | 2,8% | 1,7% |
| Inflation | 2,6% | 4,3% | 5,2% |
| Rate | 0,75—1,00% | 1,75—2,00% | 3,25—3,50% |
Market reaction
To 10 Many investors were confident in June: The Fed will raise the rate only on 50 basis points, as promised. And then came the inflation statistics., which showed, that price growth has accelerated again.
Then it became clear: The Fed will have to tighten policy more aggressively and raise the rate faster.. This fact was played by the market a few days before the Fed meeting.. With 10 to 14 June, in just three trading sessions, index S&P 500 fell by 7%, a index NASDAQ - on 8%.
Rate hike is a negative for the stock market. Higher rates make loans more expensive not only for consumers, but also for corporations. And this affects the profitability of their business..
Among other things, along with the rate, the yield of bonds also grows. As a result, safe fixed income assets become more attractive to investors compared to stocks..
See also, too high a Fed rate threatens a recession in the economy. During periods of recession, company revenues fall, and then - and the prices of their shares.
After the Fed meeting, the market seemed to exhale: S&P 500 has grown on 1,5%, NASDAQ — on 2,5%. Such speculative growth should not be misleading.. Globally, the situation has not changed in any way: inflation remains high, and the Fed rate is relatively low..
To cope with rising prices, The Fed will have to further tighten policy. Fed Chairman Jerome Powell did not hint, a said directly: defeating inflation is the main goal. And that means, that the regulator in the event of a collapse in the stock market will not save it, as in recent times.
Probably, the bearish trend in the stock market will not change to a bullish one until then., until there are clear signs of a slowdown in inflation. Right now, stock indices don't have a single reason., to update historical highs.
Next time, data on consumer prices will be published 13 July. And it is unlikely that by this day the S index&P 500 will rise above the current mark of 3800 points. But short-term speculative rebounds, as in the second half of May, quite possible.
By the end of the year, the Fed will hold four scheduled meetings. Regular — July 26–27. According to Powell, the bet will be raised to 50 or 75 basis points.
