The Big Day- The FOMC Interest Rate Decision
The most important day of the week is here, the FOMC day. Today, we will hear from the Fed about their monetary policy decision, and traders have been speculating about this particular meeting going back to December last year. The Fed faces the most monumental challenge of starting the process of undoing its massive economic help. The Fed would have liked economic conditions and, more importantly, geopolitical conditions much different than they are today. Still, inflation keeps them on edge, and today they have no other choice but to act.
The most important action, or let’s say the announcement that the Fed will be making today, is hiking the interest rate for the first since the pandemic started when the Fed lowered the interest to its all-time low. It is essential to say that Covid-19 hasn’t left us yet as it was only recently when a headline came out about China shutting down its “Silicon Valley,” its province Shenzhen.
Shutting Shenzhen has increased the headwinds for the supply chain, which pushed inflation to its current level. But luckily, it is almost only China that has a zero-tolerance policy about covid as other nations have announced that they have to live with covid and it is nothing more than flue. This particular stance made the Fed confident that this is the right time to start lifting the interest rates. Economic data also indicates that the US economy has recovered from Covid’s blow.
However, no one was expecting something happened: the war in Ukraine. Sanction on Russia and cutting Russia from the financial banking system have consequences for the US economy and the rest of the world. The Fed knows that the world will never be the same again, and even if Russia stops its invasion, these sanctions imposed on Russia aren’t going to go away that easily.
This particular event has made the Fed change their plan, and in their recent commentary, the Fed Chairman has indicated that the Fed is likely to increase the interest rate by 25 basis points. Remember, before the geopolitical tensions between Ukraine and Russia, a much more aggressive or hawkish move was expected from the Fed. Speculators believed that the Fed would increase the interest rate by at least 50 basis points to catch up with the rest of the central banks, especially the Bank of England, which increased the interest rate twice this year.
The Big Question
The big question is how the market will react when the Fed reveals its decision. Well, our base case scenario is that the Fed isn’t going to be hawkish, and they are going to make it clear that market players should not expect a rate hike in every single meeting. The Fed will increase the interest rate by 25 basis points only today, and provided that the Fed shows its concern about the ongoing situation in Ukraine, which they will, markets are likely to remain calm.
Now, if the Fed announces 25 basis points interest rate hike, but at the same time, they also show a more hawkish side, indicating that another interest rate is likely to follow up in the next meeting, markets may not like this. This is mainly because economic data has started to slow down, and no one knows how the war situation will influence the global economy. For instance, if Russia defaults, how much impact will it have on Russian companies and other European and US-based companies.
Punishing Russia what it did has its cost attached to it. The reality is that lawmakers can only make their best guess. After all, the actual situation could be completely different as we are in an uncharted market territory.
Gold
The precious metal is the one that traders will be watching the most. It has been trending lower for the past three days as traders expect the Fed to increase the interest rate. The metal’s price is likely to be highly volatile today, and we may see the price violating the 1,900 price mark. If the Fed increases the interest rate by only 25 basis points, we will likely see a relief rally for the yellow metal. However, if we see the Fed raising the rate any more than that, we could easily see the gold price dropping much lower than where it is now.