In the previous post, we determined that the US stock market will likely continue its downturn. However, everything now rests on how much the Fed will raise the rate at the next meeting, which will take place next week. The stock market will continue to tumble in every circumstance, but we feel that a 1 percent rate hike might lead to a catastrophe. In principle, a few weeks ago, the prospect of raising the rate by 1 percent looked like total fiction. However, we recall that the option with an increase of 0.75 percent at the beginning of this year looked implausible. But what can we do if inflation continues to climb at a cruising pace? Even Bloomberg believes that a 1 percent hike is an entirely real option.
According to Loretta Meister, a Fed member, a 1 percent rate hike cannot be ruled out. Many analysts feel that a hike of 0.75 percent is the minimal level attainable at the next meeting. In addition, it should be remembered that the ECB, famed for its lethargy in recent months, hiked the rate yesterday by 0.5 percent, which few people expected from it. Thus, we estimate the chance of an increase in the rate by 1 percent at a time at 40 percent. The key question under the current conditions is whether a recession will commence in the American economy? The head of the Federal Reserve Bank of Atlanta, Rafael Bostic, believes that a recession can be avoided even under a severe tightening of monetary policy. It is predicated on the fact that the unemployment rate remains low and is not growing and that the labor market in the United States frequently creates jobs. Bostic underlined that he supports a 0.75 percent rate hike in July and an overall 1.5 percent increase this year. He also emphasized that the current rate of 1.75 percent is not "slowing down the economy," and the level of 3 percent is neutral, at which the economy does not grow but does not slow down. Bostic finds no signs that the economy has started to slow down. We, like most professionals, maintain a somewhat different point of view. In the first quarter, US GDP dropped by 1.6 percent. In the second, it is anticipated to lose roughly 1 percent. The yearly value of GDP should determine the recession, so if the declining trend continues in the third and fourth quarters, it will be feasible to conclude that the recession has begun. And the possibility of its occurrence, from our point of view, is at least 50 percent. However, a recession is a recession, and we are more concerned about where the stock market will move? And the higher the risk of a recession, the higher the probability that stock indices and stocks will continue their drop. Thus, we do not yet see any reason to foresee a big expansion in the US stock market.
