Federal Reserve Interest Rates May Peak at 6% This Year

The US Federal Reserve has been steadily raising interest rates in an effort to bring inflation down to its 2% annualized target, currently standing at 6.5%. On Feb. 1, the Fed lifted its benchmark interest rate another 0.25 of a percentage point to a range of 4.50% to 4.75%. This is the highest level the Fed’s key interest rate has been in more than 20 years, which is bad news for stocks in general, and rapidly growing, unprofitable companies that need to borrow heavily to fund their expansion.[0]

Recent empirical research used cross-country firm-level data and information on input-output linkages to examine how US monetary policy shapes global firms’ sales and investment spending.[1] The authors found that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods.[1] They also found that financial factors drive differences, with US monetary policy spillovers having a much smaller impact on firms that are less financially constrained.[1]

Traders on Wall Street are now placing bets that the Federal Reserve will hike interest rates beyond 6% this year. Preliminary open interest indicates that current trading activities on the Chicago Mercantile Exchange are increasing, according to Bloomberg.[2] Swaps traders still anticipate that the Federal Reserve’s benchmark rate will reach a high of 5.2% in July, then decline in the latter part of the year.[3]

Jerome Powell, President of the Federal Reserve, has repeatedly stated that the struggle against inflation is still ongoing and the job market remains very robust.[4] He is scared to go too far with the rates, but also scared not to do enough.[5]

Investors in options are increasing their wagers that the maximum rate for the US could reach 6%. Red flags are being raised due to the robust US job market, the renewed surge in energy and commodity prices due to Chinese reopening optimism, and the sudden rise in second-hand car prices.[6]

Powell has not indicated that the Federal Reserve will initiate rate reduction in 2023, only stating that “if we do see inflation coming down more quickly then that will play into our views.”[7]

It may take six to nine months for the effects of the monetary policy tightening we have seen thus far to be seen.[8] We need to assess the data as it arrives.[8] At present, there is a growing consensus that the Federal Reserve will continue to raise rates.[6]

0. “3 Stocks to Sell After the Recent Fed Rate Hike” InvestorPlace, 5 Feb. 2023, https://investorplace.com/2023/02/3-stocks-to-sell-after-the-recent-fed-rate-hike

1. “How Much Can the Fed’s Tightening Contract Global Economic Activity?” Forex Factory, 13 Feb. 2023, https://www.forexfactory.com/news/1205370-how-much-can-the-feds-tightening-contract-global

2. “Wall Street Traders Betting Interest Rate Will Surpass 6% This Year” Coinspeaker, 9 Feb. 2023, https://www.coinspeaker.com/wall-street-traders-interest-rate/

3. “Traders are Betting the Fed Will Raise the Overnight Rate to 6.0%” Stock Investor, 13 Feb. 2023, https://www.stockinvestor.com/56436/traders-are-betting-the-fed-will-raise-the-overnight-rate-to-6-0/

4. “Will the Fed end the 2023 market rally?” kuna noticias y kuna radio, 1 Feb. 2023, https://kesq.com/news/2023/02/01/will-the-fed-end-the-2023-market-rally/

5. “Fed President Jerome Powell keeps saying that the Fed’s fight with inflation is not done yet” FXStreet, 9 Feb. 2023, https://www.fxstreet.com/analysis/fed-president-jerome-powell-keeps-saying-that-the-feds-fight-with-inflation-is-not-done-yet-202302090733

6. “The 6% Bet” Action Forex, 10 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/485735-the-6-bet

7. “Is This the End of the 2023 Market Rally?” Entrepreneur, 3 Feb. 2023, https://www.entrepreneur.com/finance/is-this-the-end-of-the-2023-market-rally/444342

8. “Outlook for US fixed income and equities Franklin Templeton” Beyond Bulls & Bears, 12 Feb. 2023, https://global.beyondbullsandbears.com/2023/02/13/outlook-for-us-fixed-income-and-equities-amid-tighter-financial-conditions/