The main US stock indices – the DOW Jones, the NASDAQ, and the S&P 500 – edged higher on Monday. Overall, they keep retracing up against the downtrend. The current rise in the indices should not be seen as the beginning of an upward movement or the end of the current trend. It is just a small correction, which is about to end soon. The Fed is now halfway up to the 3.5-4.0% interest rate. There will be more rate hikes, and the stock market cannot but react to them. The higher the interest rate, the higher the yield on government bonds and bank deposits, which are safe-haven assets. Naturally, demand for them is mounting, while it is falling for risk assets. Therefore, the stock indices are likely to lose another 20%.
Ahead of the FOMC meeting, the question is: how much will the Fed raise the benchmark rate this time? Will it be a 0.75% or a 1.00% rate increase? Any of the scenarios is likely. Since the interest rate will eventually be lifted to 3.5%, the regulator seems to have nothing to worry about the pace of monetary tightening. A few months ago, James Bullard, the president of the Federal Reserve Bank of St. Louis, tried to convince his colleagues that it was necessary to raise the rate as quickly as possible. He turned out to be right because inflation kept accelerating despite all the Fed's attempts to tame it. The market seems to have already priced in a 0.75% rate hike. Therefore, it will hardly be impressed with the decision. However, in the case of a 1.00% rate increase, the greenback is likely to soar and the US equity indices to plummet. In other words, the dollar will resume growth, while the indices will be falling for days or even weeks after the rate decision.
Thus, the fundamental background for stock instruments has not changed in the past week. None of the FOMC officials has recently given any comments as they are not allowed to make any statements about monetary policy 10 days before the upcoming meeting. Anyway, continuing inflation is enough to expect aggressive measures from the regulator.
