The big day came and the eyes of the market were turned to the Federal Reserve (Fed) meeting. I would like to draw attention to the important points that we need to look at before the next decision at 21.00.
First, we look at the CME FedWatch Tool website because it gives us an idea of what the market’s Fed rate expectation is by looking at CME futures contracts. As of the moment I wrote my article, the probability of a 25 basis point interest rate increase seems to be 86%.
Another important issue is that the Fomc Statement will be announced together with the interest rate decision. Line spacing is important here. When we look at the FOMC statement announced at the March meeting; “The committee may make some further policy tightening to achieve a sufficiently restrictive monetary policy stance to return inflation to 2 percent over time,” it said. If the committee does not insist on this stance and refers to the banking crisis and recession concerns, interest rate cuts can be expected by the market towards the end of the year.
At 21.30, Powell will give a speech and answer questions from the press. When I watched previous Fed meetings, I saw that the conversations were very important. Powell can change the direction of the market with his hawk or pigeon attitude. However, in the last Fed meeting, questions about the banking crisis were skipped, but when the minutes of the Fomc meeting, which was announced on April 12, were announced, we saw the expression banking crisis and recession. We will see if Powell will insist on fighting inflation and monetary tightening in his speech.
As you know, the effects of the banking crisis continue. We were somewhat relieved after the latest First Republic Bank bailout, but fears rose again when the bank’s first-quarter balance sheet saw its deposits plummet more than expected. We’ve all seen the news that JPMorgan is going to buy First Republic Bank, but it’s definitely not going to happen tomorrow.
Another issue is that the US Treasury Secretary Janet Yellen warned that the measures taken to limit the debt limit may be exhausted by June 1 and the country may face a cash shortage after this date. In other words, the USA has come to a point where we can say that all these interest rate hikes have to stop.
In short, they are confused. We will all see whether the expectation of inflation down to 2% or the fear of recession will prevail. Futures traders should be extra careful these days.
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