To The Moon

As we have seen what the strong job market has send the market into the RED.

Look at my other article on what to expect for U.S. Unemployment Rate and Non-farm payrolls data due to release today (07 Jul 08:30am EST).

How I would look at U.S. Labor Data Due To Release On 07 Jul 23

I think I have a couple of articles where I share that I would go for defensive stocks when we have fed restarting the Rate Hike regime.

Question I ask myself is when Fed pause the rate hike in June, will the subsequent rate hike be higher and more aggressive? Let’s be honest with ourselves by observing how the global economy is doing.

The 2 largest economy, U.S. and China has their own economic challenges to overcome. U.S. is trying to bring its inflation rate down to 2% and China is experiencing a weak domestic growth.

So in order to understand how Fed Rate Hike regime will start and move into which direction. I would like to share and decipher the United States Fed Funds Rate.

One of the key tools at Fed disposal is the Fed Funds Rate.

Understanding this rate is vital for investors, businesses, and individuals alike, as it has a significant impact on the economy.

What is the Fed Funds Rate?

The Fed Funds Rate refers to the interest rate at which depository institutions, primarily banks, lend and borrow funds from each other overnight.

It serves as a benchmark for short-term interest rates and plays a critical role in influencing borrowing costs for individuals, businesses, and the overall availability of credit in the economy.

The Federal Open Market Committee (FOMC), a body within the Federal Reserve, determines this rate.

Interpreting the Fed Funds Rate

Monetary Policy

The Fed Funds Rate serves as a primary tool for the Fed to implement its monetary policy. By raising or lowering this rate, the Fed can influence borrowing costs and control the money supply. A higher Fed Funds Rate generally signals a more restrictive monetary policy aimed at controlling inflation, while a lower rate suggests an accommodative stance to stimulate economic growth.

Economic Growth

The Fed Funds Rate provides insights into the overall state of the economy.

A higher rate indicates that the central bank believes the economy is growing strongly, potentially with increased inflationary pressures.

Conversely, a lower rate may indicate a weaker economy or a need for stimulus to encourage borrowing and spending.

This is how the current Fed Fund Rate stands

It looks like it will be going up which mean that economy is growing strongly, this would give Fed a strong case to rate hike.

I would think it would be a minimum of 25 basis point and might be 50 basis point if Fed decide to take a aggressive move to reduce inflation.

Interest Rates

The Fed Funds Rate acts as a benchmark for various other interest rates in the economy. When the Fed raises the rate, banks typically increase their prime rates, affecting the rates for mortgages, auto loans, credit cards, and other consumer loans.

Therefore, changes in the Fed Funds Rate can directly impact borrowing costs for individuals and businesses.

Here is how interest rate projection looks like.

If we look at the current interest rate projection which stands at 5.6%, this would mean the borrowing cost for our credit lines and credit card, loans would go up.

Stock Market and Investor Sentiment

The Fed Funds Rate has a significant influence on the stock market. When interest rates rise, it becomes more expensive for companies to borrow money for expansion or investment, potentially leading to lower corporate profits and a decline in stock prices.

Consequently, changes in the Fed Funds Rate can impact investor sentiment and stock market performance.

Exchange Rates and International Capital Flows

Changes in the Fed Funds Rate can affect the value of the U.S. dollar relative to other currencies. A higher rate tends to attract foreign investors seeking higher yields, increasing the demand for the U.S. dollar and potentially strengthening its value.

On the other hand, a lower rate may reduce the attractiveness of U.S. assets, leading to capital outflows and a weaker currency.

We can take a look at the money supply for Apr 2023, it seem like M0 have quite a good increase, but M1 and M2 has reduced significantly.

On the other hand, the central bank balance sheet seem to increase for June 2023, which mean economy is strong. This might be another good reason for Fed to raise the rate.

Summary

By looking at how Fed Fund Rate is moving is another way, this is how I would look at where will Fed rate hike campaign move.

It looks like Fed would have a pretty strong case to go 25 basis point hike. But it will depend on some of the other economic data that will be released prior to Jul FOMC meeting.

Here are some of the stocks that we can start looking and planning in our trading.

$Meta Platforms, Inc.(META)$ $Vertex Pharmaceuticals(VRTX)$ $JPMorgan Chase(JPM)$

Appreciate if you could share your thoughts in the comment section what do you think will be Fed appetite for the rate hike?

Do like, share and comment on this article if you find this thought useful.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.