The Fed Begins to Take a Step, Here's the Explanation!
Expectations for a Fed interest rate hike are growing stronger ahead of the release of US inflation data and Fed Chairman Kevin Warsh's testimony before Congress. Bond market participants are beginning to predict that a rate hike could occur sooner, even at the July meeting.
The shift in expectations is evident in the interest rate options market. The probability of a 25 basis point rate hike this month has risen sharply to around 50%, from less than 10% previously. The two-year US Treasury yield is also holding above 4.25%, reflecting the market's growing confidence that the Fed could still take a hawkish stance.
Pressure intensified after Fed Governor Christopher Waller said that a near-term interest rate hike would be worth considering if core inflation data heats up again. This statement is significant because Waller was previously known as one of the Fed's more dovish officials, so this change in tone has made the market even more cautious.
The market's primary focus now lies on the June US CPI data. Headline inflation is expected to fall to 3.8% annually from 4.2% in May. Meanwhile, core inflation is expected to rise 0.2% monthly and slow to 2.8% annually. Although projections indicate inflation is starting to ease, investors remain concerned that price pressures are not falling fast enough to reach the Fed's 2% target.
Market concerns are also exacerbated by the surge in oil prices due to the US-Iran conflict and the planned blockade of Iranian-linked ships. If energy prices continue to rise, inflation could rebound, making it difficult for the Fed to ease policy. At the same time, Kevin Warsh is known for his reluctance to provide overly clear directions regarding the next policy steps, making it even more difficult for the market to interpret the Fed's direction.
As a result, the US dollar and bond yields could potentially remain strong as long as the likelihood of an interest rate hike remains high. This could put pressure on gold, technology stocks, and riskier assets like crypto. However, if the CPI data is lower than expected and Warsh doesn't sound overly hawkish, market pressure could ease somewhat, although the likelihood of a July interest rate hike remains intact.(asd)*
Source: Newsmaker.id
