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Ahead of the Fed meeting – the markets are pricing in an unchanged interest rate with a probability of 95%!

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Tonight at 21:00 GMT, the Fed is expected to announce that the interest rate remains unchanged for the upcoming months at 5.0-5.25% levels. This will be the first time since March 2022 that the Fed will not raise interest rates, and any other decision will be a huge surprise.

The interest rate is not expected to rise this time. According to most interpretations, this is only a temporary stop, and it’s not the end of the cycle of interest rate increases. The interest rate market expects another quarter percent increase in July and then a pause for several months. But such forecasts, by their nature, tend to change constantly depending on the macro data.

After the inflation figure was published last night and continued the trend of disinflation to a rate of 4% on an annual basis, the chance of an interest rate increase decreased by 20% in a few minutes and now stands at only 5%. Although overall inflation came in below expectations, core inflation came in line with expectations, and super core inflation (core excluding residences) increased every month – so the Fed can be said to have an excuse if it decides to surprise. However, the above option is unlikely.

At 21:30 GMT, the Fed’s press conference will begin, and Particularly, it will be interesting to hear what Fed Chairman Powell says about the path of interest rates later this year. (although less mighty than it was six months ago) and consumers are indeed cautious but continue to go out to restaurants and fly on vacations. Inflation continues to cool down, and according to the indicators in the last three months, the rate of price increase is on its way back to the Fed’s target. Only the core index (excluding food and energy prices) continues to be too high.

Powell will likely repeat his position that the Fed does not want to make mistakes made in the past and lower interest rates too early and risk re-heating interest rates. He will also talk about the fact that some of the effects of the high interest rate come with some delay, so it is necessary to wait and see.

What will the stock market want to hear? That the interest rate will not rise again shortly and that there are signs of a slowdown in inflation. Any hint that interest rates may go down later (as the bond market expects) could encourage investors to buy stocks. On the other hand, anything Powell said that could imply that interest rates will continue to rise could lead to a market sell-off.

 

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