The Federal Reserve will begin cutting interest rates in the first quarter, billionaire investor Bill Ackman predicts. Will the regulator reduce the rate, how will this affect the US national debt, the strength of the dollar, oil prices, which are denominated in dollars, and, as a result, the ruble, experts said.
The American business community is tired of unprecedentedly high interest rates, which are increasing the debt of the world’s largest economy and could lead to default. Therefore, there are increasingly frequent predictions that the Federal Reserve System (Fed) will move on to softening its policies. American billionaire investor Bill Ackman also hopes for a reduction in interest rates in the first quarter. Finance Mail.ru interviewed analysts and found out how the Fed’s policy will affect the US national debt, the strength of the dollar, oil prices denominated in this currency, and, as a result, the ruble.
Now the US Federal Reserve rate is at a high level – 5.25-5.5% per annum, this is the highest figure in the last 22 years.
According to analysts surveyed by Mail.ru Finance, the American regulator will begin reducing rates in May-June.
“We can reasonably expect the Fed to lower the rate, since the US economy is far from in the best shape and needs to be cheered up,” says independent economist Leonid Khazanov.
However, this is unlikely to lead to changes in the amount of government debt, which has been growing in recent years regardless of fluctuations in the Fed rate, but it could weaken the US dollar, which serves as an international reserve currency, and help strengthen the ruble.
But not all prices denominated in dollars are affected by the Fed rate. For example, a reduction in interest will not have an effect on the cost of copper, which depends on many factors.
For example, the price of oil is greatly influenced by the consumption of this raw material in China, India, the European Union and the United States. “Accordingly, in the event of a serious reduction in oil purchases by key consuming countries and regions, a change in the Fed rate could have the same effect on the price of oil as a mustard pot on a dead man,” noted Leonid Khazanov.
“Really, Bank of America and Deutsche Bank recently published forecasts according to which the US Federal Reserve System, the Fed, will nevertheless begin to lower interest rates next year,” said Vladimir Rozhankovsky, managing director Trade123.
For many, this sounds like a shock forecast: after all, inflation both in the United States and in the world continues to gallop – moreover, the almost three-year cycle of monotonous increases in the discount interest rate did not cause a significant shift in the direction of what now looks like an illusory goal of 2%, the economist recalled.
The Fed has raised interest rates sharply over the past year, approving 11 rate hikes in hopes of quelling inflation and cooling the economy. In just 16 months, interest rates have risen from zero to above 5%. This marked the fastest pace of tightening since the 1980s.
Now more and more economists are inclined to believe that the nature of the current inflation is not at all in cheap credit money (only crazy or desperate people take loans from banks now!), which are precisely “treated” by raising the discount rate, which is what has been done all these long years. months of the Fed, and an excessive and unsecured constantly growing money supply and budget deficits reaching double-digit percentage values (this has never happened in history!).
In his opinion, for now we can only say with confidence that the net beneficiaries of this state of affairs will be, first of all, gold (which is already finally showing signs of life) and Bitcoin.
“If the Fed (and after it, according to established tradition, the ECB) allow such an aggressive reversal of their monetary policy, without waiting for a real improvement in the situation with inflation, then fiat (not backed by gold – editor’s note) money will start again depreciate with a vengeance, which will almost certainly give impetus to all value assets with limited emissions – primarily precious metals and bitcoin,” predicts Vladimir Rozhankovsky.
Until recently, against the backdrop of an increase in interest rates, the main leitmotif of the speeches of Fed officials sounded as follows: the current rate level already corresponds to a strict monetary policy. This results in progress in reducing inflation, but the economy and labor market are much more resilient to rate increases than they were in previous periods.
Inflation is the queen of regulators
According to Olga Belenkaya, head of the macroeconomic analysis department at Finam, the Fed will move to lower interest rates in the second half of 2024. “Taking into account the stability of the American economy and the presence of factors that may prevent a further reduction in inflation towards the target (scarce labor market, geopolitical risks, fragmentation of the global economy, decarbonization), the rate reduction in 2024 will be small (50-75 bps) and will continue in 2025,” the specialist explained.
If the American economy enters a recession or risks of a financial crisis arise, the rate reduction may occur at a faster pace, she believes. If the decline in inflation stops or it turns upward, Olga Belenkaya does not rule out maintaining the rate at the current level or even raising it.
VELES Capital analyst Elena Kozhukhova also agrees with her: the dynamics of the Fed interest rate in the coming months, all other things being equal, will depend on inflation.
Overall, she said, lower interest rates are negative for the dollar, reducing its relative attractiveness compared to currencies in countries where borrowing costs are higher.
A weaker dollar, all other things being equal, is favorable for oil and other US currency-denominated commodities. However, oil and other commodity assets are primarily influenced by factors determining supply and demand in the market. In particular, oil dynamics in the coming months will depend on the levels of raw material production that countries will set OPEC+, as well as the demand for oil in the world’s largest economies – China, the USA, India, Europe and, accordingly, their ability to continue expansion.
“For the ruble, the potential weakening of the dollar is positive, as it can help further the growth of the Russian currency from recent lows,” noted Elena Kozhukhova, an analyst at Veles Capital Investment Company. “Nevertheless, in general, the behavior of the ruble will be determined by intramarket factors, such as the preservation of mandatory norms for the sale of foreign currency earnings by Russian exporters, the dynamics of the trade balance of the Russian Federation, the level of the key interest rate of the Central Bank of the Russian Federation and the state of the Russian economy.”
“This information is for informational purposes only and does not constitute an individual investment recommendation.”
2023-11-29 14:43:49
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