US economic data warns of possible mistakes in the FED decision!
Before the FED meeting, we had US retail sales data in the continuing the chains of US economic data. US retail sales data shows that sales in May fell by -0.3%, down from 0.7% in April and less than 0.2% of estimates.
In addition, the New York Fed manufacturing index increased sharply to -1.2 in June from a -11.6 a month ago. However, it is still far below the market expectation of 3.0. These numbers get even scarier for the US GDP, while we can see that the US export price index is increasing while import prices are falling, killing the country's GDP. With these, we can all say that the US economic growth is already slowed, and we risk seeing it in the critical range below zero.
On top of all of these data, yesterday's FED decision can significantly increase the chances of a recession, even though Mr. Powell denied that during his press conference after the FOMC meeting. Let us review the FED decisions and expectations in more detail.
In Yesterday's FOMC meeting, 10 participants voted to raise interest rates by 75 basis points, while only Kansas City Fed President George disagreed and voted for a 50 bps raise.
In the dot plot, the interest rate path in the following three years has been significantly revised up to 3.4% in 2022, from 1.9% expected in March, 3.8% for 2023, up from 2.8% expected in March, and 3.4% in 2024, up from 2.8% primarily expected in March. These numbers were in line with upward revised inflation expectations.
The Fed raised its median PCE inflation forecast for this year to 5.2%, up from a 4.3% in earlier estimates; however, policymakers are expecting the inflation to fall back to 2.6% in 2023 and 2.0 % in 2024, respectively, down from 2.7%, and 2.2% in earlier expectations.
For the labor market, they expect the unemployment to reach 3.7% this year, up from 3.5% in March estimates and rise further in 2023 and 2024 to 3.9%, up from 3.5% and 4.1%, up from 3.6% in March expectations.
Market reaction:
Unlike earlier estimates from over hawkish stances, the US dollar fell to 104.62, after a short-term rise to 105.80, at the time of Fed Chair Powell's speech, as he mentioned a 75 bps rate hike is not typical and will not become the norm. The same reaction we could see in the stock markets as well. However, with time passing, we can see that the market is becoming more aware of what happened. As I mentioned above, US economic data are not showing a bright future; therefore, expecting more raises is wrong with the current hawkish stance. Moreover, it was the reason to see the future markets start to accept the reality with almost 2% loss on average in the first hours, which is expected to continue to happen in the cash market as well. Therefore our future expectations for the US dollar are to continue its bullish trend with more pressure on the US and even European stock markets.
This decision also will increase the pressure on the cryptocurrency market.
