Your Money: US rate hike – What it may mean for us

financialexpress.com:

There is a lot of attention on what the US Federal Reserve is doing, and rightfully so. To recap, it has hiked the overnight interest rate by 5 percentage points in the current hike cycle. The pandemic-period low interest rate was 0 to 0.25%; currently it is 5 to 5.25%. The question is, what is the expectation now, on further rate hikes.

Going by a recent statement by the US Fed chairman, there is a likelihood of two more rate hikes of 25 basis points each, totalling 0.5%. As per market assigned probability, the probability of the Fed rate being hiked by 25 basis points is very high. That is, it is almost a given that the rate will be hiked on that day. Question is, what is the market expecting thereafter? The FOMC meeting after July 26 is scheduled for September 20, 2023. Since it is sometime away, market expectation will be shaped by developments in the run-up to that date.

Easing inflation in the US

As per currently available data points, we have easing inflation in the US. CPI inflation for June 2023 eased to 3%. The implication is, the pressure on the US Fed to hike rates would be that much lower. That is, the early indication on the likelihood for the meeting on September 20, 2023 is soft.

There is an indicator called DXY, which is the Dollar index, measuring the strength of the US Dollar against a basket of six major global currencies. The index was at approx. 103.5 in the first week of July. Currently, as we write, it has eased to 100.6. The easing of the DXY shows that the market is looking at the end of the rate hike cycle, as softer interest rates in the US implies that much softer flow of funds into US investment assets. As per communication from the US Fed, as well as market expectations, there is