Following the Federal Reserve’s decision to increase interest rates in July, marking the highest level attained in 22 years, the prevailing focus on Wall Street centres around the potential for another rate hike in September. At present, the Federal Reserve maintains a targeted range of 5.25-5.5% for the federal funds rate, which has been the result of 11 rate hikes since March 2022, with indications suggesting the possibility of another rate hike later this year.

Nonetheless, recent moderation in economic indicators has spurred optimism among investors. Not only is there a prospect of a rate pause in September, but there is also speculation that this could signal the conclusion of the Federal Reserve’s historical pattern of rate increases. This optimism gained traction in August, as economic reports presented a mixed assessment of the economy while revealing a general cooling of inflation.

Market analysts project a 90% likelihood of the central bank maintaining rates during its impending September meeting. Looking ahead, the Federal Reserve is anticipated to embark on a course of interest rate reductions starting from the second quarter of 2024. Following this timeline, incremental reductions in borrowing costs are envisaged on a quarterly basis thereafter.

Recent data disclosed a notable deceleration in consumer price growth during July, surpassing expectations on an annual basis. This development strengthens the argument for a recalibration of policy, moving away from the prolonged phase of tightening that commenced in March 2022. While headline inflation has demonstrated significant deceleration since its zenith last summer, it persists above the Federal Reserve’s 2% target.

Source: TradingView

The surge in equity markets has temporarily halted as investors grapple with the notion of waning U.S. economic expansion. Seasonal elements are poised to amplify the downward pressure, coupled with stricter lending standards and initial indications of slackening in the labour market. These signals suggest that the US economy may be confronting impending challenges.

The ramifications of the Federal Reserve’s monetary tightening measures could compound the impact of seasonal influences, with historical patterns indicating September and October as historically unfavourable months for U.S. stocks.

Market participants are contending with the mounting likelihood of a correction in equities following a surge that propelled the benchmark index to within a mere 5% of its all-time high.

The decline in US equities has extended over the past two weeks, reflecting ongoing uncertainties surrounding the Federal Reserve’s battle against inflation. The pullback caused the equities benchmark to slip below its 50-day moving average for the first time in over five months.

The selling pressure extended on Tuesday following an unexpected surge in retail sales figures, indicating the capacity of the economy to withstand higher rates, which could potentially dissuade policy makers from executing a strategic pivot. The financial sector was down, with Fitch’s cautionary note about potential downgrades for major lenders adding to the pressure.

Amid a backdrop of a hawkish Federal Reserve and a slowdown in China’s economic pace investors are cautious following a strong rally in the stock market in the first half of the year.

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