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Markets eager for Fed hike pause

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By Han Tan, Chief Market Analyst at Exinity Group

Markets are widely expecting a 25-basis point hike by the Federal Reserve on Wednesday; anything else would be a shocker.

What’s less certain is whether the Fed is truly ready to pause after this week’s hike. Policymakers have to preserve their inflation-fighting credibility while taking into account financial stability risks.

Despite First Republic Bank’s rescue over the weekend, persistent fears over further US banking turmoil have added to the latest risk-off trade. Ramped-up recession risks as well as a potential US default have only added to the wall of worry for market participants.

If Chair Jerome Powell all but confirms that the terminal rate in this tightening cycle has been reached, that should spell some immediate relief for risk assets, likely to the Fed’s chagrin.

However, policymakers may yet signal their intention to keep rates higher for longer, while leaving the door open for future rate hikes in the face of still-stubborn inflation.

A “hawkish pause” could then offer support for the US dollar, while dragging the likes of US equities and spot gold lower.

 

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