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Investing.com – Markets are concerned about a return to aggressiveness in Fed rhetoric after a brief lull that has prompted markets to be optimistic.
A lot of better-than-expected positive data emerged last week to shake market expectations on interest rates, which were reflected in the violent fluctuations of the dollar and equities.
After a short time, during which the markets have priced in the next move of the Fed, with a rise of about 50 basis points.. It seems that the hypotheses of a seventh rise of 75 points are starting to take hold.
5% is not enough
JP Morgan (NYSE) experts say: The Fed may decide that 5% is not nearly enough and the federal funds rate may exceed those rates.
This will happen if the US economy continues to grow at a strong pace and inflation does not reduce significantly in light of the failure of the Fed to counter the crisis.
JP Morgan. Screenplay 2000
JPMorgan strategists led by Nikolaos Panijirzoglou decided to propose this new scenario, in which the Fed would raise the key interest rate to 6.5% during the second half of 2023.
In a research note, the JPMorgan team notes that it now has a 28% chance of this scenario happening, and the bank’s strategists say market prices give that possibility a 10% chance.
Armageddon… Will it happen again?
This scenario is widely seen as an “Armageddon” scenario as the rise in interest to those levels was followed by a violent stock market crash.
“Since the last time the federal funds rate was at 6.5% was in 2000, that interest rate level followed very heavy losses for risk markets at the time,” say experts at JPMorgan.
However, the JPMorgan team did not expect the current battle of Armageddon in financial markets to repeat itself and indicated that demand for bonds has already collapsed and should remain weak as central banks engage in quantitative tightening.
Experts say: “In our view there is no doubt that interest rates at 6.5% would be negative for most asset classes, including equities, bonds and credit, however the eventual downside is likely to be more limited than Armageddon would suggest.”
Markets and declines
“This unprecedentedly weak demand forecast for 2023 raises the bar that demand would experience another big negative surprise in 2023 and increases the risk of an upside surprise,” JPMorgan experts say.
Experts say: “The Fed’s interest rate hike to 6.5% will have significant short-term consequences for the yield curve.
uneven background
“All of these stock demand indicators are at fairly low levels, creating an erratic scenario as another major recession looks much less likely for 2023,” the analysts said.
This comes after they had already noted that the S&P 500 has remained broadly unchanged over the past seven months, even as Fed rates climbed to 5% from around 3% in May.
Federal assurances
Federal Reserve Chairman Jerome Powell said last week that the US central bank could ease the pace of interest rate hikes as soon as possible in December.
The US Federal Reserve will hold a meeting on December 13 and 14 to discuss the fate of interest rates and, despite calm markets, Powell said explicitly that the fight against inflation is not over yet.
A change in Federal Reserve policy is not excluded, as it became possible to increase by 0.75% instead of 0.50% next week.
Anxiety returns
The US Federal Reserve raised interest rates for the sixth consecutive time in early November, by 0.75% for the fourth consecutive time.
Strong US jobs data with a surprising rise in the PMI coincided with an improvement in consumer confidence, which gives the Fed confidence that the economy is still out of the recession trap.
So far, market expectations are that the Federal Reserve will continue to raise its key rate until it hits 5%, before pausing for some time.
