The Bank of Canada on 25/1 (Wed) hiked its key interest rate to 4.5%, the highest level in 15 years, & became the 1st major central bank fighting global inflation to say it would likely hold off on further increases for now-Phew❣️-The 25bps “final” hike has lifted rates at a record pace of 425bps in 10 months to tame inflation, which peaked at 8.1% & slowed to 6.3% in Dec, but still more than 3 times the 2% target🎯
⚠️ In its quarterly Monetary Policy Report which includes new forecasts, the bank painted a picture of an economy that is going to stall & could tip into a recession during the 1st half of the year, bringing inflation down to about 3% at mid-year and back to 2% in 2024.
Moving to 🇺🇸 most economists in a Reuters poll forecast that the Fed will end its tightening cycle after a 25bps hike at each of its next 2 policy meetings & then likely hold interest rates steady for at least the rest of the year as inflation continues a steady downward trend,
⭐️ More than 80% of forecasters (68 of 83) in the latest Reuters poll, predicted the Fed would downshift to a 25bps hike at its 31 Jan-1 Feb meeting ➡️ If realised, that would take the policy rate - the federal funds rate - to the 4.50%-4.75% range.
⭐️ The remaining 15 forecasters see a 50bps coming in 2 weeks, but only one of those was from a 🇺🇸 primary dealer bank that deals directly with the Fed.
⚠️ The fed funds rate was expected to peak at 4.75%-5.00% in March, according to 61 of 90 economists. That matched interest rate futures pricing, but was 25bps Lower Than the Median Point for 2023 in the dot plot. projections issued by Fed policymakers at the end of the 13-14 Dec meeting.
⚠️ In an environment of a strong jobs market, the Fed will be cautious in calling the top in interest rates.
⚠️ The expected terminal rate would be more than double the peak of the last tightening cycle & the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed's policy rate would be at the end of 2023, but around two-thirds of respondents had a forecast for 4.75%-5.00% or higher.
⭐️ More than 60% of respondents, 55 of 89, said the Fed was more likely to hold rates steady for at least the rest of the year than cut✂️ That view lined up with the survey's median projection for the 1st✂️ to come in early 2024.
⚠️ However, a significant minority, 34, said rate cuts this year were more likely than not, with 16 citing a plunge in inflation as the biggest reason. 12 said a deeper economic downturn & 4 said a sharp rise in unemployment.
🤔💭My Thoughts:
(1) I think the next rate hike will be 25bps but Powell will remain hawkish🦅 for the need to maintain it's restrictive policy for a period of time as inflation remain above the Fed's 2% 🎯 Rationale:
➡️ 25bps so as to achieve soft landing.
➡️ Labour market remains relatively strong.
➡️ Powell has repeatedly emphasised his 2%🎯
(2) It’s too early for Fed to pause the rate hike in March. The longer the inflation stays above 2%, the more problematic things are, so I think rate hikes will only pause when the 1st report of personal consumption expenditures price index (Fed's preferred measure of inflation) comes in at an annual 3% rate.
😅 I rather prepare for the worst scenario & be cautious so that my money doesn’t💸💸💸
(3) Be Calm & Invest Wisely as Recession Is Still Possible❣️
‼️ The Reuters poll also showed a nearly 60% probability of a 🇺🇸 recession within 2 years. While that was down from the previous poll, several contributors had not assigned recession probabilities to their forecasts as a slump was now their base case, albeit a short & shallow one.
‼️ The 🌎 biggest economy was expected to grow at a mere 0.5% this year before rebounding to 1.3% growth in 2024, still below its long-term average of around 2%.
With mass layoffs underway, especially in financial and technology companies, the unemployment rate was expected to rise to average 4.3% next year, from the current 3.5% & then climb again to 4.8% next year.
Futures are currently down at the ⏰ of writing & it seems like investors might be looking to secure their 1st round of profits $DJIA(.DJI)$
Fellow 🐯🐯🐯 what are your thoughts about the rate hike/pause❓Type away in the comments section & please help to click on the “Like” & “Share/Repost” buttons at the Bottom Right corner so that more 🐯🐯🐯 can access this information, many thanks🤗🥰 You will Greatly Encourage Me❣️
As usual-🤔💭 Consider POV & Actions of investors + 👩🏻💻👨🏻💻 Research + 🗑FOMO & Greed = Investing Wisely 🤓🤗 + Accumulating Wealth 💵💰
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