22 Sep

The US Federal Reserve is not going to stop. The risks of a global crisis are growing

September 22, 2022

By JustForex

The Federal Reserve raised interest rates and changed its outlook for further rate hikes, indicating a period of higher interest rates. The prospect of higher interest rates over the long term has put pressure on growing sectors of the economy. As the stock market closed on Tuesday, the Dow Jones Index (US30) decreased by 1.70%, and the S&P 500 Index (US500) lost 1.71%. The NASDAQ Technology Index (US100) fell by 1.79% yesterday.

The Fed raised rates by 0.75% and signaled that rates will reach about 4.4% by the end of the year and 4.6% by the end of 2023, well above the 3.8% previously projected. For 2023, inflation is estimated to fall to 3.1% from the previous forecast of 2.7%, and in 2024, inflation expectations will remain unchanged at 2.3%. Fed members estimate that the economy will grow by 0.2% in 2022, sharply lower than the previous forecast of 1.7%. Growth forecasts have also been revised downward for 2023 and 2024. The Fed also predicts that a recession might be avoided, despite the need to accelerate rate hikes. But economists at Jefferies do not believe this and believe the Fed is incapable of effecting such a delicate planting of the economy. The pace of tightening has increased the risk that the Fed will slow growth too much, pushing the economy into a deep recession. The Fed’s aggressive push to bring inflation down to 2% would take years and cost higher unemployment and slower growth, according to policymakers who have questioned the prospects of a so-called “soft landing.” Bond markets quickly assessed the growing risk of recession as the Treasury yield curve flipped further. The yield on the 2-year Treasury bond rose above 50 basis points compared to the yield on the 10-year Treasury bond.

Federal Reserve Chairman Jerome Powell said Wednesday that the US real estate market will likely undergo a “correction.” This year, the Fed’s rate hikes have had the biggest impact on the real estate sector, slowing sales and lowering prices. Housing inflation will remain high for some time.

As for business activity, the geopolitical backdrop, slowing growth in China, the possibility of energy rationing in Europe, a strong dollar, and volatile domestic equity and real estate markets point to clear recession risks worldwide.

Equity markets in Europe were mostly up yesterday. German DAX (DE30) gained 0.76%, French CAC 40 (FR40) added 0.87%, Spanish IBEX 35 (ES35) declined by 0.01%, British FTSE 100 (UK100) closed the day at 0.63%.

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Prime Minister Liz Truss’ plans to cut payroll taxes and reverse a planned corporate tax hike risk putting the UK national debt on an unsustainable upward trajectory, the IFS Institute for Financial Studies said Wednesday. Truss’ plans will likely result in a permanent budget deficit of about 3.5% of the Gross Domestic Product once energy subsidies end, well above the pre-recession average of 1.9%. Truss has promised tax cuts of about £30 billion a year. Finance Minister Kwasi Kwarteng will outline the details of the financial plan on Friday.

Finland will prepare a bill to restrict Russian tourists from entering its territory, Foreign Minister Pekka Haavisto said at a news conference in New York.

The European Commission is preparing a new package of sanctions against Russia. On September 23, the EU executive body will initiate a discussion of its proposals with ambassadors of EU countries. Among the proposed measures will be a restriction on Russian oil prices and a ban on imports of Russian diamonds and other luxury items.

The US President Joe Biden’s main talking points at the UN General Assembly:

  • Russia is shamelessly violating the basic provisions of the UN charter. If countries can pursue imperial ambitions without consequence, it jeopardizes everything the UN stands for.
  • Putin recklessly threatens nuclear weapons.
  • No one has threatened Russia, and no one but Russia has sought conflict.
  • The United States does not seek conflict with China.

Oil prices fell after the Fed raised interest rates to curb inflation because it could also reduce economic activity. A widespread increase in US oil, gasoline, and distillate inventories announced by the Energy Information Administration last week sent oil prices near their January lows.

Increased geopolitical risks made not only the dollar a safe haven but also the precious metals gold and silver, which yesterday showed resilience to the rising dollar. Investors are returning to safe haven assets because there are almost no alternatives now.

Asian markets were trading lower yesterday. Japan’s Nikkei 225 (JP225) was 1.36% lower, Hong Kong’s Hang Seng (HK50) decreased by 1.79% on Wednesday, and Australia’s S&P/ASX 200 (AU200) was 1.56% lower on the day.

Asian fund managers are betting that the inevitable fall of the Japanese yen will soon stop, and some are even getting ready for the possible fall of the Japanese government bonds. Analysts believe Japanese politicians will ask Bank of Japan Governor Haruhiko Kuroda to cancel the 0.25% ceiling on 10-year JGBs and try to steer the economy away from trouble. But for now, this is just a talk. At its meeting today, the Japan Central Bank kept all key elements of its policy unchanged.

S&P 500 (F) (US500) 3,789.93  −66.00  (−1.71%)

Dow Jones (US30) 30,183.78 −522.45 (−1.70%)

DAX (DE40) 12,767.15  +96.32 (+0.76%)

FTSE 100 (UK100) 7,237.64 +44.98 (+0.63%)

USD Index 111.32 +1.10 (+1.00%)

Important events for today:
  • – Japan BoJ Outlook Report (Tentative);
  • – Japan BoJ Interest Rate Decision (Tentative);
  • – Japan BoJ Press Conference at 09:30 (GMT+3);
  • – Switzerland SNB Monetary Policy Statement at 10:30 (GMT+3);
  • – Switzerland SNB Interest Rate Decision at 10:30 (GMT+3);
  • – Norwegian Interest Rate Decision at 11:30 (GMT+3);
  • – UK BoE Interest Rate Decision at 14:00 (GMT+3);
  • – UK MPC Meeting Minutes at 14:00 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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