As expected, the FED's rate remains unchanged at 5.25%, but there are indications that hikes may be forthcoming. Note the plural. According to the updated forecasts from committee members, we could see rates rise to between 5.5-5.75% this year. This implies at least two more salutations from the regulator, potentially as soon as July, to be followed with another rise in September. Swap quotations are currently suggesting this path.
The contributing factors are clear: rising prices and a super-heated labor market. Core PCE has decelerated but not to the desired extent. As long as it remains above 5%, that serves as a clear signal that further policy tightening is necessary.
This is unfavorable news for gold and the markets, along with anyone needing to refinance their debts. This latter category including the U.S. Treasury.The possibility of a double rate hike and hints of persistent high rates imply a high probability that by 2030-2032, U.S. debt payments could reach the $1.7-1.8 trillion range.
This is an extremely negative scenario for the country – it could ultimately lead to the U.S. dollar relinquishing its role as the world's primary reserve currency. While it remains a contentious point, recent geopolitical trends point in this direction.
So why aren't we seeing a market collapse? Partly because of the vast volumes of Call options purchased by large institutional investors. A significant portion of these are due to be exercised this Friday. Therefore, it's more advantageous for large players to drive the markets up, or at the very least, to prevent them from falling.
What might prompt the Fed to change course and begin easing policy ahead of schedule?
- Significant troubles in the corporate debt market, meaning high-profile bankruptcies.
- Issues within the banking sector.
- A stock market crash.
- Real, emerging problems in the labor market.
In such a climate, I'm on high alert for news related to all these plotlines. And of course, I'm maintaining my short positions.
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