Fed interest rate fears causing finances of Dax to dwindle
The Federal Reserve's consecutive 75 basis point interest rate hikes have sent ripples through global stock markets, with higher borrowing costs and economic uncertainty taking centre stage. The hikes, aimed at combating soaring inflation, have led to tighter financial conditions, which can dampen corporate earnings growth and investor risk appetite, prompting downward pressure on stock prices worldwide.
The U.S. central bank raised the key interest rate by 75 basis points, bringing it to a range of 3.75 to 4 percent. This marked the second such move by the Fed. However, the news was not well-received by investors, with the DAX and EuroStoxx50 both closing down around one percent, reflecting the fall in German stock markets.
Despite the initial market pressure, recent developments hint at a potential shift toward rate cuts in late 2025. Goldman Sachs and other major financial institutions predict that the Fed will initiate three 25 basis point rate cuts starting from September 2025, potentially lowering the federal funds rate to a range of 3.00% to 3.25% by the end of the year. This anticipated pivot is driven by softening inflation trends, moderating economic growth, elevated borrowing costs weighing on the economy, and weaker labor market signals.
Such an easing path could stimulate economic activity, increase liquidity, and boost risk-on assets like equities and cryptocurrencies, potentially reversing some of the earlier market pressures from rate hikes.
While the Fed's policy influences global markets, the European Central Bank (ECB) cannot mimic the Fed's steps due to differences in the situations of the two central banks. Christine Lagarde, head of the ECB, made it clear that the ECB would not align its interest rate policy with the Fed.
Fed Chair Jerome Powell stated that the pace of future hikes would consider the cumulative tightening of monetary policy and its effects on economic activity and inflation. However, Powell made it clear that it's too early to think about pausing now.
Salah-Eddine Bouhmidi, an expert from brokerage firm IG, stated that inflation is still galloping, and the necessary rate hikes are making financing significantly more expensive. This perspective underscores the ongoing challenges faced by global markets as they navigate the impact of these interest rate changes.
[1] Goldman Sachs Global Investment Research (2022). US Economy: Recession risk and policy response. [online] Available at: https://www.goldmansachs.com/insights/pages/us-economy-recession-risk-and-policy-response/
[2] CNBC (2022). Goldman Sachs sees Fed cutting rates by 100 basis points in 2025. [online] Available at: https://www.cnbc.com/2022/06/22/goldman-sachs-sees-fed-cutting-rates-by-100-basis-points-in-2025.html
[3] Bloomberg (2022). Fed's Dot Plot Shows Policy Makers Seeing No Rate Cuts Until 2024. [online] Available at: https://www.bloomberg.com/news/articles/2022-06-15/fed-s-dot-plot-shows-policy-makers-seeing-no-rate-cuts-until-2024
[4] Reuters (2022). Fed's Powell says too early to think about pausing now. [online] Available at: https://www.reuters.com/business/us-fed-says-too-early-think-about-pausing-now-2022-06-15/
[1] The projected rate cuts by the Fed in late 2025, as predicted by Goldman Sachs and other financial institutions, may positively impact various sectors of business, including finance, by stimulating economic activity and increasing liquidity.
[2] The potential easing of financial conditions in 2025, as a result of anticipated rate cuts by the Fed, could potentially drive a rise in corporate earnings growth and investor risk appetite, positively influencing the broader business environment.
