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The Federal Reserve’s Interest Rate Projection and Market Uncertainty
According to the most recent data, including labor market indicators and business activity metrics, the Federal Reserve is gradually nearing its economic targets. Signs of this include a softening labor market and a deceleration in business activity within the service sector. Nevertheless, uncertainty still lingers concerning the inflationary landscape.
Looking ahead to next week, on the 13th, the Consumer Price Index (CPI) report is scheduled for release, although the consensus forecast remains undisclosed at this point. (The previous CPI reading was at 3.2%).
One week later, on the 20th, Jerome Powell will provide commentary on the Federal Reserve’s monetary policy.
Attention has now shifted to the Federal Reserve’s November meeting. While the market assigns a 92% probability of a pause in the interest rate hike during the current September meeting, the estimated probability of a pause in the interest rate hike for November stands at 53%.
The Federal Reserve has left open the possibility of a 25 basis point rate increase, periodically reiterating its stance in response to newly released statistical data. Consequently, there is a lack of clarity in the market regarding whether the Federal Reserve’s rate hike cycle has concluded or not.
As a result, trading in the S&P 500 broad market index has entered a sideways pattern, ranging between $4300 and $4600.
The correlation between the stock and cryptocurrency markets has been steadily decreasing since April and currently registers at 24%.
The “Fed” refers to the Federal Reserve System
which is the central banking system of the United States. It was established in 1913 and consists of the Board of Governors, regional Federal Reserve Banks, and various committees. The Federal Reserve plays a crucial role in the U.S. economy and financial system. Its primary objectives are:
Monetary Policy: The Federal Reserve is responsible for formulating and implementing monetary policy in the United States. This involves managing the money supply and interest rates to achieve specific economic goals, such as stable prices (low inflation) and maximum sustainable employment.
Bank Supervision and Regulation: The Fed supervises and regulates banks and financial institutions to ensure their safety and soundness. It also sets certain banking regulations and standards.
Financial Stability: The Federal Reserve monitors and takes actions to promote the stability of the financial system, including addressing financial crises and disruptions.
The “Fed interest rate” typically refers to the federal funds rate
Which is one of the key tools the Federal Reserve uses to implement monetary policy.
Here’s how it works:
The federal funds rate is the interest rate at which depository institutions (like banks) lend reserve balances to each other overnight, usually to meet their reserve requirements.
The Federal Open Market Committee (FOMC), a component of the Federal Reserve, sets a target range for the federal funds rate based on its assessment of the state of the economy. The FOMC meets regularly to review economic conditions and decide whether to change the target rate.
When the Federal Reserve wants to stimulate economic activity, it may lower the target federal funds rate. Lower interest rates can encourage borrowing and spending by businesses and consumers, which can help boost economic growth.
Conversely, when the Fed wants to cool down an overheated economy or combat inflation, it may raise the target federal funds rate. Higher interest rates can make borrowing more expensive, which can slow down economic activity and help control inflation.
Changes in the federal funds rate can have a ripple effect throughout the broader economy, influencing interest rates on various types of loans, including mortgages, car loans, and credit cards, as well as affecting investment decisions and financial markets. As a result, the Fed’s management of interest rates is a crucial tool in its efforts to achieve its dual mandate of price stability and full employment.
