| Ronan Menachem, Chief Economist of Mizrahi Tefahot
The announcement that is expected tonight in the US is a defining event for the markets. This will be the end of a well-directed expectations coordination process by the Federal Reserve, which fired all guns blazing to make it clear to the market that inflation for it is the forecast of everything. Therefore, it is expected that the central bank will raise the interest rate by 75 “B, so that it will stand at 3% to 3.25%.
The Fed managed to get the markets to perceive unusual interest rate hikes as a key scenario – thus achieving its goal. Therefore, the mere increase in such a rate will not necessarily cause further real declines in the stock and bond markets, beyond the declines that began since Fed Chairman Jerome Powell’s “8-minute speech” at the end of August.
There is a (rather small) possibility that the interest rate will rise even by a full 1% – a step that may still result in another blow of declines, but not necessarily. Much depends on the Fed’s new forecast regarding interest rates and inflation, which will also be published today.
If the expected interest rate presented by the Fed does not rise significantly (currently it stands at 3.4% by the end of the year and 3.8% by the end of 2023), the market may actually accept this positively, because it will say that most of the interest rate adjustment process has already been done. Such a forecast would also correspond to the downward slope from left to right of the yield curve to maturity of the bonds.
On the other hand, if this forecast from July rises at a sharper rate (say, by 75 bps or higher for each of the two years), this would indicate that the Fed considers it necessary to raise the interest rate much more than it thought just 3 months ago. In such a case, it is possible that Tonight we will see more significant declines in the markets.
Beyond that, it must be remembered that the Fed does not operate in a vacuum, and only yesterday we were informed that the central bank of the Fed raised the interest rate by a whole percent. The British central bank (the Bank of England) is also on track for a seventh increase of half a percent.
The governor will hold a press conference, and his every word about the expected growth in the US (does he assume continued strength of the American economy?), the (what emphasis does he place on the drop in general inflation in the last two months, compared to the increase in core inflation, excluding energy and food?) And the interest rate, of course, will have a lot of weight in terms of the markets’ reaction.
What is sure to happen tonight at 21:00, the market will remove one factor of uncertainty from it, and if it receives indications from the Fed that the process of raising interest rates from now on will be more measured (in addition to Powell’s emphasis on a policy dependent on data – which has been somewhat pushed into the corner since his hawkish remarks at the third conference ‘Casson Hall), it is possible that the declines from the last period will moderate.
The writer is chief economist of Bank Mizrahi Tefahot. This review is not intended to be a substitute for investment marketing that takes into account the data and the special needs of each person.