Fed Ponders 50-75 BPS Hike in July: Risk Assets May Be Set For Further Downside
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Fed Ponders 50-75 BPS Hike in July: Risk Assets May Be Set For Further Downside

The Federal Open Market Committee is set to further intensify its hawkish stance in battling inflation following the release of the policy meeting minutes.
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The US Federal Reserve released the minutes of its June 14-15 meeting yesterday, revealing its growing anxiety over historic levels of inflation. The communique reads hawkish and points to the apex bank’s plans to implement more restrictive policies to help prevent a possible recession.

Consequently, the Feds may be set for another 50-75 Basis Points rate hike for July. This comes after it increased interest rates by 75 bps in June, the highest increase since 1994. The minutes revealed that participants agreed that rising inflation required more restrictive interest rates, especially if inflation persists. However, the Feds expect inflation to remain above 2% for a long time. 

Feds Risk Recession to Tackle Persistent Inflation

The minutes of the last FOMC meeting show that the Feds want economic growth to slow down. Although a recession is not the desired result, the Fed appears more than willing to risk one if it means achieving a slowdown in inflation.

Cleveland Fed Inflation Nowcasting CPI month-on-month Current period. Source: Bloomberg

Data released before the meeting in June showed that inflation, currently at its highest in over 40 years, is not slowing down. According to Cleveland Fed, Year on year Consumer Price Index is predicted to be 8.67% which would be a new cycle high. The month-on-month reading is now trending close to 1%, as seen in the chart. Therefore, there is little chance that the Fed will ease up at the July FOMC meeting.

Consequently, these predictions suggest that the Feds will keep raising rates until they perceive a fair balance in the dynamics of its financial conditions. These hawkish monetary policies will likely hurt the economy while also affecting growth stocks and risky assets.

Finally, the Feds did not specifically address the likelihood of a recession. They believed the job market remained tight while the U.S. gross domestic product “was rising in the current quarter.” Despite this, they acknowledged the risks were to the downside, particularly that the Fed policy could have a larger-than-anticipated impact.

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Risk-on Assets Face Uncertain Future Amidst Interest Rate Hike 

Bitcoin and other risk-on assets face an uncertain future amidst the Fed’s continued interest rate hikes. Analysts and traders are beginning to take a keen interest in how these investment vehicles react to the increase amidst the general financial market downturn. 

Previously in March, when the Feds hiked the interest rates, Bitcoin did not react significantly. Although, some experts believed that the market had priced in the effect of the hike following repeated warnings from Fed chair Jerome Powell. However, subsequent hikes saw Bitcoin and stocks, which are increasingly correlated, fall in value.

Clearly, with Bitcoin in a bear phase, it is difficult to predict how the market will react to the continued aggressive approach of the Feds. With traditional savings accounts now delivering higher returns and lower risk, it is possible that demand for BTC may decline as rates climb. Also, the correlation between Stocks and Bitcoin means that the digital asset will react the same way the equities would respond to the hikes.

One-day chart of DOW Jones, S&P 500, and Nasdaq Stocks. Source: Yahoo Finance

Following the release of the FOMC meeting minutes, all three Wall Street benchmarks maintained substantial gains throughout the remainder of the day. The chart above shows that the Nasdaq Composite increased by 0.38% to 11,367.77. The S&P 500 gained about 0.42%, closing at 3845.6. Meanwhile, the Dow Jones Industrial Average rose by 0.38% to 31,085.30.

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Do you think further interest rate hikes by the Feds would mean more downside for risk-on assets? Let us know your thoughts in the comments below.