The Fed's next steps are being made by evaluating the CPI, economic growth, and looking into the long-term effects of job market improvements.
A sell-off in technology stocks, with Amazon (AMZN) and Apple (AAPL) both falling 2%, weighed heavily on Wednesday trading, sending the Nasdaq index down slightly more than 1%. Furthermore, the Federal Reserve's most recent series of speakers reinforced the notion that interest rates must continue to rise in order to combat inflation. While much will depend on the data, markets remain vulnerable to interest rate volatility, as Powell pointed out.
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On the bright side, Federal Reserve Bank of New York President John Williams stated that market forecasts for terminal interest rates are very reasonable, which reinforces the general consensus and should reassure investors.
However, Williams added that policy might need to be tightened for a few years, which Fed Governor Lisa Cook confirmed.
In short, a more precise scenario for the Fed's next steps, but with the possibility that interest rates will remain high for an extended period of time, which would contradict the market's most widely held belief that interest rates will be cut by the end of this year.
This will be determined in the short term by inflation figures such as the CPI of the United States, which will be released next Tuesday, and in the long term by how economic growth and the labor market evolve.
If GDP figures and leading indicators of the economy show no signs of vulnerability and the labor market remains strong, the Federal Reserve is unlikely to cut interest rates at the end of this year, as the interest rate curve suggests. Hence, this would result in an increase in long-term market interest rates (bond yields), which would initially have a negative impact on the stock market or, at the very least, dampen a potential upward momentum. In these circumstances, the US dollar would suffer as well.
The market consensus at the moment is that the US currency will continue to fall in the near future. Most analysts believe the EUR/USD will rise above 1.12, but if interest rates rise later, this trend may reverse.
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Sources: Bloomberg, Reuters