Wednesday’s meeting of the Federal Reserve is very important for traders and financial market participants. Will the Federal Reserve agree to raise interest rates again?
The US Federal Reserve is expected to raise interest rates to 75 basis points at its next meeting. Many economists believe that this increase in interest rates will harm the global economy. Traders active in the market believe in a possible decrease in interest rates next year.
Read more: The future of digital currencies in 2022
The possibility of raising interest rates again by the Federal Reserve
As the Federal Reserve prepares to announce another interest rate hike this week, traditional market traders are waiting for interest rate cuts next year. Most economists and investors believe that the Federal Reserve Board’s Federal Open Market Committee will raise interest rates by 75 basis points, or three-quarters of a percent, at the two-day FOMC meeting in Washington, DC.
Some other traditional market analysts believe that the Federal Reserve will cut interest rates next year to prevent a deeper recession in the US economy. According to these traders, the economy is too weak to handle higher interest rates and the Fed will be in trouble if markets continue to fall.
The Federal Reserve futures market on CME Chicago shows that traders believe interest rate hikes will continue until January of next year and that the Federal Reserve will cut interest rates for several months starting in February.
The current behavior of the Federal Reserve is largely similar to the behavior of the institution in 2019. At that time, the central bank took a “wait and see approach” for the first time after raising interest rates four times. The FOMC finally started cutting interest rates in October 2019 due to weak economic performance and stated that it was wrong about the outlook for the US economy.
Inflation is still at the highest level in the last four decades. The current 9.1% inflation is mainly the result of strong consumer demand caused by the worldwide coronavirus pandemic. The Federal Reserve is trying to curb this demand by raising interest rates.
This week will be crucial for the Federal Reserve. Bob Laccino, Path Trading Partners Chief Strategist and Stock Think Tank Portfolio Manager, said:
If the Fed returns to easing mode with 6% inflation, a lot of money will flow into the economy with 6% inflation. They shouldn’t, but it’s still a possibility.
Will the Fed raise interest rates by 100 basis points?
Decisions made by the Federal Reserve are closely watched by Bitcoin traders and cryptocurrency analysts, as the traditional broad market sell-off caused by the macroeconomic environment is highly correlated with cryptocurrency market movements.
Bitcoin fell about 3.5% in the early hours of Monday in anticipation of the Fed’s decision. While a 75 basis point hike would reduce the Fed’s funds rate by 2.25%, many economists believe another more aggressive rate hike would be a more appropriate decision. Brian Coulton, chief economist at Fitch Ratings, said:
If you listen to the Fed’s narrative on the state of policymaking, it’s pretty clear that they’re going to take a restrictive approach to fiscal policy. Logically, there is a possibility of another 100 basis point rate hike, and I wouldn’t be at all surprised if that happens.
As the global representative of the world economy, the Federal Reserve should react to the conditions in the currency market. For this reason, the recent decision of the European Central Bank (ECB) to raise interest rates by 50 basis points could force the United States to raise interest rates by more than this amount.
According to the Coinbase report, the interest rate increase by the European Central Bank will put pressure on the euro in the short term. Bitcoin and Ethereum have performed better than the world’s most traded currencies such as Euro, Pound and Japanese Yen.
Federal Reserve Chairman Jerome Powell continues to insist that the US economy is not in recession due to a strong labor market. “We need strong action from the central bank,” former Treasury Secretary Lawrence Summers told CNN on Sunday. But he did not comment on the appropriate amount of interest rate increase.
Some people, like Cathie Wood of Ark, believe that we are currently in a recession. The US Bureau of Economic Analysis (BEA) will release an upcoming report on the decline in economic activity in the second quarter of 2022. This report is measured based on gross domestic product (GDP).
The GDPNow tracker predicts that GDP fell by 1.6% in the second quarter of this year. We are currently witnessing a decline in GDP in two consecutive quarters. According to many experts, these data indicate an economic recession in America. According to the National Bureau of Economic Research (NBER), the decline in gross domestic product on Thursday will not be cause for concern.
According to Laccino, the Fed cannot take responsibility for making a mistake by raising interest rates again, but it is undoubtedly happening. A recession is the only thing that lowers prices. Referring to the 100-point interest rate increase, he said:
The Fed is trying to push the economy into a mild recession and they know that asset prices will suffer, but they need this mild recession.
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