FRS approaches crisis

The US Federal Reserve raised the target range at a rate of 0.25% to 1.75-2.00%. This decision was expected by the markets and did not cause a noticeable increase in volatility. Most macroeconomic forecasts have also been revised upward and several «soft» formulations have disappeared from the text of the accompanying statement, which indicates an increase in optimism about the outlook for the economy.

The forecast for the GDP has been raised for the current year from .7% to 2.8%, expectations for unemployment have been improved from 3.8% to 3.6%, the inflation forecast has been enhanced as well with the expectations for this year to be fixed at 2.1%, and the inflation core will be at 2.0% in the current stock and 2.1% in the next two. In other words, the Fed makes it clear that all inflation targets will be confidently achieved.

The most important change affected the forecast for the rate. The Fed apparently expects to reach the target level of 3.4% a little earlier. For the current year, the forecast for the rate has been raised from 2.1% to 2.4%, which automatically indicates two more increases this year, which are most likely to occur in September and December, and another 3 increases in 2019.

More aggressive formulations of the accompanying statement relate mainly to inflation. The Fed no longer declares that it controls inflation carefully and does not indicate a gradual or rapid increase in rates. At the same time, a cautious step was taken. The interest rate on the excess reserves of banks was increased by 20 points to 1.95%. Now, it is just below the upper limit of the range, and apparently, will shift further to the middle of the range. The Fed intends to push commercial banks to not keep excess funds on the account of the Fed but look for other possibilities for placement. It is likely that these intentions are related to the fact that the Fed is actively reducing the balance by withdrawing from treasures, and if so, we can expect continued incentives for banks to actively participate in financing the government.

The reaction of the markets to the results of the meeting was mixed but it is most likely that it will follow in the coming days. For the global credit market, the results of the Fed meeting are interpreted unambiguously as tightening of financial conditions and increasing risks. By the end of 2017, the volume of debts outside the US, denominated in USD, reached 10.7 trillion, an increase of more than 5.5 trillion. since 2008, and this is a direct result of the soft monetary policy of the last decade.

The higher value of growth rates mean a higher increase in the cost of servicing this mass of debt, which will mean increased risks. Accordingly, it is necessary to expect the fall of stock markets and, possibly, stabilization or reduction of prices for raw materials. US stock markets reacted to the results of the meeting by a slight decrease, in particular, the S & P 500 lost 0.4%, and now it is likely that we will soon see a global turnaround of the world’s stock markets.

Now, the move is for Europe. Today, the ECB will hold its meeting on monetary policy. It is expected that statements will be made about the exact timing of the curtailment of the asset purchase program and, possibly, will be indicated at the beginning of the cycle of rate hikes next year. Meanwhile, the markets assume that the asset repurchase will be completed by the end of 2018 and the growth rates will begin with a time lag of six months, that is, around June 2019. This alignment will retain the dollar’s advantage and therefore in the next few days, it is likely that the trend will resume on the growth of the dollar.

Another important event today is the end of the pause taken by Trump for the introduction of new customs tariffs in trade with China. The pause was necessary for Trump to support China’s dialogue with the DPRK but now nothing prevents the implementation of the planned measures, the threat of renewed tensions in trade will help strengthen the dollar’s position.

Thus, the dollar is ready to resume growth. The EURUSD pair can test the support level of 1.1725 for strength today, the growth of gold is postponed until better times, and the currencies of developing countries will be put under the greatest pressure.

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