While the Tel Aviv Stock Exchange is painted red amid investors’ concerns about the emerging legal reform, the main drama in the markets is expected on Wednesday (9:00 p.m. Israel time) when the Federal Reserve will likely announce another interest rate increase. The vast majority of economists and contracts estimate that the increase will be at a rate of 25 basis points, to a level of 4.5%-4.75%. This, after raising interest rates by 50 points in December, which already marked the beginning of the downshift by the Fed.
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In 2022, the American central bank carried out seven interest rate increases, which brought the interest rate in the US to the highest level since 2007. The latest decision, which as mentioned was 50 points, was preceded by four consecutive aggressive increases at a rate of 75 basis points, in an attempt to control rising inflation in the US.
Ronan Menachem, Chief Markets Economist at Mizrachi Tefahot, points out thatThe household income and expenditure report for December brought up a number of findings that will be warmly received by Fed Governor Jerome Powell. “First, there is a noticeable slowdown in household spending, which fell by 0.2% in December, twice as much as market expectations. Second, the rate of annual change in the price index of household spending, the Fed’s favorite index for measuring inflation, continues to slow down. In all of 2022, the index rose 5%, down from 5.5% in November and about 7% in the middle of last year,” he elaborates.
Despite the optimistic picture, Menachem mentions that the rate of change of the core index, excluding food and energy, is still lower than that of the general index (4.4% compared to 4.7% in December), so that the supply and goods side is still pulling upwards and the target level of 2% inflation is still far away – and so Also the Fed’s inflation forecast for 2023, which stands at 3.1%.
“In my opinion, the data are positive enough for the upcoming interest rate increase to be moderated to only 25 bps. However, there is no point in fostering expectations that the upcoming interest rate increase will be the last and I estimate that the interest rate will remain at its (high) final station (probably 4.75% or 5%) throughout the year,” Menachem estimates.
Alex Zebzinski, Chief Economist at Meitav Investment House, mentions that most of the world’s central banks are downsizing, and not just the Fed. “The summary of the activity of the world’s central banks in January shows that only 11 of all banks raised interest rates compared to an average of 25 in the last four months. Not only did the number of banks raising interest rates decrease, but also the monthly rate of increase moderated from 0.5%-0.75% to about 0.25% on average. All this indicates that the cycle of interest rate hikes is coming to an end,” he estimates.
As for the upcoming decision on Wednesday, Zabrzynski also thinks that the latest data supports a more moderate interest rate increase – and even estimates that it is highly likely that this will be the last increase in the cycle. “The PCE inflation rate continued to decline, including the core index. The annual inflation rate based on the indices in the last six months has already fallen to 2%, with the PCE Core index falling to 3.5%. Consumers’ inflation expectations in the University of Michigan survey also continued to decline. In our estimation , there is a high probability that this week will be the last interest rate increase in the US in the current cycle.”
Uri Greenfeld, the chief strategist of Psagot Beit Investments, writes in his review that the Fed realizes that its policy is “close to exhaustion.” “Due to the weak data environment in the US, there are more and more doubts whether the Fed will be able to continue the process in March – when the contracts give only an 80% probability of an interest rate increase. In other words, the Fed realizes that its policy is close to exhaustion and is expected to finish raising interest rates. True, it is still too early for the Fed to start considering interest rate reductions, this is expected to happen only towards the end of the year, but this is definitely good news from the point of view of the markets”, Psagot assesses.