The long-awaited interest rate decision will be made and released today by the Federal Reserve (Fed). Yesterday after the Consumer Price Index (CPI) data came out to be slightly lower than expected, US stock markets rose, the Nasdaq index continued upwards, and the futures markets still rated the chance of the Fed leaving rates unchanged as high.
After the CPI data came in slightly lower than expected and in anticipation of the Fed's decision on interest rates, which will be announced today, the US stock markets initially reacted positively.
Data released yesterday showed that headline inflation rose by 4% in May from last year, which was a somewhat slower pace than expected. Excluding food and fuel, prices rose 5.3% compared to last year, in this case the result was in line with expectations.
The Federal Reserve may decide to keep interest rates on hold at its meeting that concludes today as a result of the decrease in the headline CPI. Futures markets continue to indicate a stronger probability of a pause, which would enable Fed members to take a step back and evaluate how their recent initiatives have performed so far. These initiatives include the raising of interest rates over the Fed’s last ten meetings.
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A halt, however, does not necessarily mean that the Fed is done with raising rates. Since it is exceedingly doubtful that inflation will reach the Fed’s 2% target in such a short amount of time. Plus, the core CPI, which is monitored by the central bank, is still well below it, thus many anticipate a further hike in July. If the Fed does choose to pause hikes at this meeting but hints at a new hike for the next meeting, the market reaction would be similar, so they would gain little from it.
Whatever the case and as usual, investors will pay close attention to what Fed Chairman Jerome Powell has to say during today's press conference as well as the set of forecasts for inflation, unemployment, and economic output.
Although a further 25bp interest rate increase might be justified given the core CPI's continued high level, going against what the market now expects would likely disappoint investors.
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The Nasdaq index, which is most vulnerable to changes in interest rates, has been setting new records continuously since the end of April and is now approaching overbought territory on the daily RSI.
Sources: Bloomberg, Reuters