“Is it time to surprise?” – this is the main question on the eve of the Fed meeting.
If the financial system is really safe, as Janet Yellen argues, then a pause in the cycle of raising rates is not worth taking. In addition, the labor market remains overheated, and inflation in monthly terms is not particularly in a hurry to slow down.
Why is the market so optimistic all of a sudden?
It’s simple – investors, taught by bitter experience, do not believe the mantras of the head of the Ministry of Finance. Expectations of a softer tightening (25 bp), on the one hand, are pushing the indices up, and on the other hand, they are putting pressure on American treasuries.
What other options are there?
Raise the rate by 0.50% or leave it as it is. Given recent developments, the first scenario looks the least realistic. In the second case, analysts at Goldman Sachs Group (NYSE:), Barclays (LON:), and Apollo Global Management do not rule out a revision of the monetary policy by the Fed to maintain the stability of the system.
What’s better?
And here everything is creative. Depends on the nuances. For bulls, troubled banks and zombie companies, it is clear that keeping the rate at the level of 4.5-4.75% is preferable.
There are three nuances:
1️⃣ Pigeon rhetoric will not bring the economy closer to price stability, and this, for a moment, is one of the main mandates of the Fed.
2️⃣ The decision to take a break will send the markets alarm signal about the state of the financial sector.
3️⃣ The decision not to change anything is a clear signal that the Fed is capitulating.
After the members of the ECB last week voted for a 50 bp rate hike, the Fed is, pardon me, in a very juicy position. The ECB’s signal to the markets – everything is under control. And we (the ECB) will act in the same way as we planned. And the markets, surprisingly, believed.
But the Fed can’t do that.
Most likely, the most optimal option for Powell & Co will be “neither ours nor yours” – 25 bp.
• This will help avoid new “bloodsheds” in the shares of regional banks.
• This will not increase inflationary pressures.
But the most important thing is that then the head of the Fed. The markets are waiting for the words: “For the sake of helping the financial system, we will distribute money on any scale.”
What if not?
