The Federal Reserve’s July decision is just around the corner, and all eyes are on Fed Chair Jerome Powell, expecting him to play three distinct cards, each with a different impact on the US Dollar, stocks, and Gold. With contradicting economic signals and high volatility in the air, investors right now are eagerly awaiting hints about the central bank’s next moves scheduled for July 26, 18:00 GMT.
The Federal Reserve faces a delicate balancing act with two mandates – price stability and full employment. Inflation has been a primary concern, with the bank’s efforts to bring it down from its peak of 9.1% YoY in June 2022 to 3% in June 2023. Core inflation, excluding volatile energy and food prices, also declined from 6.6% to 4.8% YoY in June.
Inflation and labor market concerns
The Fed’s ultimate goal is to achieve an underlying inflation rate of 2%, but concerns remain about labor-related inflation, even though goods prices have declined. Services costs, dependent on people, continue to rise, indicating persistent inflationary pressures. The labor market remains robust, with substantial job growth, but the recent trend of rising weekly jobless claims raises questions about changing trends.
Powell hints at more hikes, but not imminently: The most likely scenario is that Powell maintains the Fed’s previous projections from June, indicating two more rate hikes this year. He may suggest another hike is likely but without urgency, resulting in a pause in September and a final move in November. This tapering down of hikes would be well-received by the markets, leading to a rise in the US Dollar, a fall in Gold, and stocks retreating initially. However, any initial move is likely to be short-lived, with data potentially turning negative, reducing the chances of another hike. Gold would present a buying opportunity, while the US Dollar would be a sell.
Back-to-back hikes: While less probable, Powell could signal a return to raising rates every meeting, causing a hawkish market response. Investors would be spooked, leading to sinking stocks, a decline in Gold, and a surge in the US Dollar. Recovering from this scenario would require exceptionally weak growth and jobless claims figures.
Wait and see: The dovish scenario, with a low probability, involves Powell ending the tightening cycle here and monitoring the impact before considering further hikes. Falling inflation and global growth concerns create a slim possibility of Powell signaling a high bar for future increases. This scenario would lead to a sharp decline in the US Dollar, while Gold and stocks would rally.
Apart from the inflation and labor market factors, the US manufacturing sector’s contraction adds complexity to the situation. While the shift to services may suggest an end to tightening, the rise of green energy and infrastructure projects may bring a manufacturing boom in 2024.
The global landscape also influences the Fed’s decisions, with struggling economies in Europe and tensions with China. Incentives measures in China could impact trade with the US, while elevated private debt and the need for control may limit China’s expansion.