14 Dec , 2022 By : Monika Singh
The US stock market ended the day in the green yesterday, but it appears that lower inflation figures aren’t enough to convince investors. Much of the initial gains in the market got eroded by the time the session ended. The market may want to listen to Federal Reserve Chairman Powell’s speech for clues about the central bank’s stance. The Fed is expected to raise interest rates by 50 basis points, which the market may have already discounted. Slowing inflation is a positive sign for the economy, but it may not be the only reason for markets to rejoice right now.
“US consumer price inflation slowed more-than-expected to 7.1% in November, marking the lowest level since the end of 2021, after peaking at 9.1% in June. We believe that this print signals that the Fed is on the right track and that its policy tightening is percolating into the right areas of the market. Against this backdrop, it is safe to assume that the US Fed will stick to a widely expected 50 bps rate hike in its policy meeting tomorrow. However, it would be premature for the Fed to signal a change in policy stance as other indicators are still above the comfort level,” says Manish Chowdhury, Head of Research at Stoxbox.
The Federal Reserve is likely to raise interest rates on Wednesday – despite data showing today a slowdown in inflation – and it could be “playing with fire” by doing so, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management, and fintech organizations.
“The central bank will argue it needs to continue with rate rises to bring inflation back to target. However, with signs of slower prices and a cooling labor market, they could be playing with fire. It’s a fine line that they have to tread. Housing inflation is keeping wider inflation high, but the Fed must ensure that this doesn’t overshadow the broader picture and continue to overdo the hikes, which would make a U.S. recession deeper and longer – and have a serious global impact,” adds Green.
Whether the Fed stays on its November stand of slowing the pace of rate hikes but a higher terminal rate, is something the market will be looking for. The initial reaction may come from the bond markets as to how the equity assets will perform. “Stocks will surge and bond yields and the U.S. dollar will go lower on hopes that the Federal Reserve can be less aggressive in their battle against inflation,” says Green.
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