The members of the central bank in the USA are facing a big dilemma, perhaps their biggest in months. Tomorrow (Wednesday) they will announce whether they intend to raise the interest rate one more time to cool inflation or take a break and leave it unchanged at a level of 4.5%-4.75%. This, in order to ease the market in a turbulent period when the financial system is suffering difficulties. On the eve of the collapse of Silicon Valley Bank and the waves of pushback that followed, the bank talked about raising interest rates by half a percent. The reason: a series of data indicated that the economy is much stronger than they thought a few months ago. Now , in light of the volatility in the financial system, the dilemma gets complicated and we will get the answer on Wednesday.
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According to CME data, the probability in the market is currently leaning towards a quarter percent increase (83% chance). The chances of the interest rate being left unchanged are 17%. In addition to this, the market estimates that as early as next June the Fed will start lowering interest rates. So far, the Fed has clearly said that they do not see an interest rate cut scenario this year. This week we will see if they stick to it.
What do economists estimate?
In his weekly review, Psagot chief strategist Uri Greenfeld analyzes market trends and inflationary pressures. In his estimation, a series of macro data show that the pressures are fading, “but this still does not justify interest rate cuts already in the middle of the year as the market is pricing”. However, he adds that “it is certainly likely that the Fed has only one or two more interest rate hikes in the pipeline.”
Rafi Gozlan, Chief Economist at IBI Investment House, writes in preparation for the decision that “the fear of a crisis in the banking system in the US and Europe has led to sharp volatility in the bond market in recent days, and to a quick and sharp turn in interest rate expectations. If until a few days ago, following Inflation is higher than expected, the markets will price an increase of about 1% in the interest rate in the US until the end of the year, including a high probability of a 0.5% increase in the next decision tomorrow, because today the pricing is completely different and reflects a partial probability of an increase in the coming week, and even beyond the series of interest rate reductions already in the middle this year. In our estimation, the Fed will raise the interest rate this week by 0.25%, and like the ECB will signal determination to return inflation to the target and that the next decisions will depend on the data.”
Ronan Menachem, Chief Markets Economist at Mizrahi Tefahot, points out before the Fed’s announcement that we received a strong hint on Thursday, when the Central Bank of Europe raised the interest rate by 0.5% to 3.50%. This increase was at the high end of the estimates, even though the banking system in the continent is also in turmoil and one of the largest banks, Credit Suisse, ran into great difficulties and needed a rescue and possibly even an acquisition.
In my estimation, Menachem writes, “Similar to the European Bank before it and the Central Bank of Great Britain the next day, it cannot be ruled out that despite the upheavals registered by financial stocks in the US – the interest rate will still rise by 50 basis points there as well. The Fed could, if it wished, differentiate the Both events in that the treatment of the banking system is given in a more targeted manner and within the framework of the actions announced by the Secretary of the Treasury and Governor Powell – and thus ‘excuse’ a sharper interest rate increase. However, if the interest rate nevertheless rises by ‘only’ 0.25%, this may be due to the fact that the interest rate in the US Even so, it is significantly higher than the interest rate in the Eurozone. The Fed may also take into account the leadership of the US economy and its banking system in the world – out of responsibility for markets outside the US borders as well. The Fed has done this from time to time in the past.”
“‘Fortunately’ for the Fed, along with the interest rate announcement this week, an updated economic forecast for GDP growth, inflation, core inflation and interest rates will be published. In addition, the personal assessments of each member regarding the course of interest rates in the coming quarters will be published – a very important bulk for maintaining the mindset within the Fed – The hawk is, or June. Using the new forecast, the Fed will be able to justify any line it chooses – restraining, or more moderate,” Menachem writes.