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As the U.S. Federal Reserve prepares to issue a sharply anticipated interest rate increase this week, traders in conventional markets are already prepared for a rate drop as early as next year.
Most economists and investors expect the Federal Open Market Committee to raise interest rates by 75 basis points, or three-quarters of a percentage point, at its two-day meeting in Washington, D.C. This meeting will be followed by a widely anticipated announcement announcing the decision on Wednesday at 2:00 p.m. ET.
On the other hand, some traditional market experts appear to be pricing in rate cuts by the Fed early next year, purportedly as part of a future effort to prevent a deepening of the U.S. recession. These analysts may believe the economy is too weak to withstand higher interest rates, or they may distrust the Fed's determination to maintain tight financial conditions if markets continue to decline.
The federal fund’s futures market on Chicago’s CME exchange indicates that traders are pricing in an expectation of rate rises through January of next year but are wagering that the Fed will begin lowering rates in February and continue doing so for at least the following several months.
This trend would be comparable to the Fed’s tightening in 2019 when central bankers first opted to take a “wait-and-see” approach following four consecutive rate hikes in 2018. The FOMC finally began decreasing interest rates in October 2019 due to a deteriorating economy, acknowledging it was incorrect about the U.S. economic forecast.
Inflation remains at a four-decade high of 9.1 percent, partly due to the coronavirus pandemic-induced surge in consumer demand. The Fed attempts to reduce this demand by increasing interest rates.
This week, though, might be one of the most critical tests of the Fed’s credibility if it eventually abandons its campaign at 6 percent inflation, much before inflation returns to its 2 percent objective.
Bob Iaccino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank, stated, “If they go back into easing mode with inflation remaining at 6%, they will be pumping money into an economy with inflation at 6%.” They should not do so, although they maybe could.
Bitcoin traders and crypto experts constantly track Federal Reserve decisions because wider traditional market sell-offs caused by the macroeconomic environment highly correlate with movements in crypto markets.
In anticipation of the Fed’s announcement on Wednesday, Bitcoin declined almost 3.5% in early Monday trading hours.
While a 75 basis point increase would put the federal funds rate to 2.25 percent on the low end, many economists feel that a 100 basis point increase would be more suitable and get the Fed to its target rate of 3.25 percent.
Brian Coulton, the chief economist at Fitch Ratings, stated, “If you listen to the Fed’s narrative about where policy ought to be, it’s quite evident that they now feel monetary policy should be restrictive.” It would make perfect sense to increase the rate by 100 basis points, and I wouldn’t be shocked if they did so.
As the world’s de facto central bank, the Federal Reserve must respond to foreign-exchange market circumstances. As a result, the recent decision by the European Central Bank (ECB) to raise interest rates by 50 basis points might drive the Federal Reserve to hike more aggressively.
According to a study by Coinbase, the ECB’s unexpected rate rise exerted short-term pressure on the euro. It was also the case that bitcoin (BTC) and ether (ETH) outperformed several of the world’s most widely traded currencies, such as the euro, the British pound, and the Japanese yen.
Fed Chair Jerome Powell asserts that the U.S. economy is well out of recession due to the robust job market, but opinions vary significantly. On CNN, former Treasury Secretary Lawrence Summers stated that a gentle landing is “improbable.” He said, “We certainly require robust action from our central bank,” although he did not specify whether he believes a 75 basis point or 100 basis point rise would be more suitable.
Some, like Cathie Wood of Ark, believe the United States is already in a recession.
The U.S. Bureau of Economic Analysis (BEA) will soon publish a report indicating a fall in economic activity in the second quarter of 2022, measured by gross domestic product (GDP).
Most economists were taught that a recession is characterized by two consecutive quarters of falling economic activity. The popular GDPNow indicator from the Atlanta Fed estimates that the economy contracted by 1.6% in the second quarter of this year. According to the National Bureau of Economic Research (NBER), Thursday’s GDP decline will not be cause for concern.
Iaccino stated, “The Fed can’t declare they’re attempting to force the economy into a recession, but in my opinion, they are, as it’s the only thing that can slow down prices.”
“I wouldn’t be surprised if they surprised us with 100,” he remarked, alluding to an increase of 100 basis points. They are attempting to force the economy into a slight recession and are aware that asset prices would suffer as a result, but they need this to occur in a slow and controlled manner.
