European Stock Markets Turn Green Ahead of Fed Decision Predictions: What to Expect from Jerome Powell’s Press Release

Investing.com – European stock markets turned green today, Wednesday, after yesterday’s rally on Wall Street and waiting for the important macroeconomic event of the day: – 21:00 pm time – and the press release that will follow from Jerome Powell, the bank’s president.

Although the market is not completely certain, yesterday’s US May CPI – which rose less than expected – gave experts some reassurance that the Fed’s decision this Wednesday is a pause..

It has gone from losing 70% today to exceeding 90% in the probability that the bank headed by Jerome Powell will not move prices today..

In this context, analysts at Link Securities say “There was fear in the market that US inflation might surprise us higher in May, which it didn’t. We believe that putting the US inflation behavior during the month under review gives enough room for the Federal Reserve’s FOMC (FOMC) To maneuver and choose to keep benchmark interest rates unchanged, which will happen for the first time after 10 consecutive increases.“

The market is already looking forward to July

These analysts added that the market believes the Fed will “wait to see how inflation and the labor market develop in June before, more than likely, going ahead with raising policy rates at the July FOMC meeting – the market now gives a 60% probability of this move.”.

Renta4 (BME:) agrees with this proposition and believes that “given that inflation remains high and the labor market remains strong, the probability of +25bps at the next meeting (July 26) remains at 60%.” “This would bring the federal funds rate to 5.25%-5.5%, which is the level it will stay at for a while in order to control inflation,” the company director added.“.

Analysts added: “We remember that the market had already canceled its expectations of a rate cut at the end of the year (which became -100 basis point) given inflation still far from the 2% level, labor market still strong, and a somewhat calmer bank “.

Bullet chart

Renta 4 analysts explain that “attention will focus on the dot chart which indicated in the last vote in (March) interest of 5.1% in Dec-23, 4.25% in Dec-24, 3.125% in Dec-25 and 2.5% in the term The long one, without forgetting that in March there were four members of the Federal Reserve who voted in favor of raising interest rates above 5.5% at the end of the year, and this number may increase in light of the data of the labor market, which is still very resilient and inflation, which is still high..

These experts add: “Similarly, we will pay attention to the update of the macro chart (growth, employment and inflation) and expectations of quantitative tightening (monthly cuts in the budget by 60.000 million in and 35.000 million in mortgage-backed securities (MBS)“.

A big reaction in the markets… if a surprise happens

“The market is currently pricing in only one rate hike in July, so any indication of more (or less) than that could trigger a significant market reaction,” economists at Deutsche Bank ETR say in a note.

The bank’s economists added: The main problem for the Fed is that the core CPI remains high. As the bank expects that today’s statement will include a “hawkish tone” with regard to monetary policy in the next stage.

The German bank expects the Fed to raise interest rates again in July, to a final rate of 5.3%. The first rate cut will occur in March 2024, followed by a cumulative cut of 275 basis points next year.

3 key factors

Thus, according to the Banknetter (BME) report, investors should watch out for three key things: (1) if there is a pause in rate hikes; (2) If we are already in the process of ending the hike and (3) Conditions for starting policy easing.

Analysts at Bankinter explain: “In the last meeting, Powell hinted at the possibility of a pause. Rates have already reached sufficiently constraining territory (5.00% / 5.25% against core PCE at 4.7%). Time must be given for cumulative tightening. Monetary policy (+500 basis points since March 2022) to show its impact on the economy. In addition, the crisis of some regional banks has damaged financial stability and it is not recommended to apply new increases..

added “However, the latest data points to stronger-than-expected economic activity (new job creation, retail sales), insufficient progress in controlling inflation and easing financial conditions (regional banking index up +20% from May lows)”.

These analysts concluded that, “In this context, the decision on the interest rate is complex. The most likely scenario is that the Fed will not raise interest rates today. But it will make clear that this is not a dead end, leaving the door open for further increases if inflation does not converge significantly.” “Right on target. It’s rather a breath-taking that buys more time to get more data and make a more accurate assessment. It’s a pause, not a final one.”