The central bank in the US left interest rates in place, but....
The evening of March 20, 2024 marked a significant moment for the U.S. economy as the Federal Reserve (Fed) decided on interest rates. The decision that came out of the meeting was highly anticipated and had the potential to affect the entire financial market. The Fed ultimately decided to leave interest rates between 5.25% and 5.5%.
One of the key factors that influenced the markets' reaction was the appearance of Fed Chairman Jerome Powell, who once again hinted that the Fed was considering cutting interest rates. This dovish sentiment sent markets to new highs and foreshadowed at least three possible interest rate cuts in 2024 starting with the June meeting. This has been a major reason for the rally in stocks. Prior to that, the market was a bit nervous about inflation, which was gaining momentum from the latest data. The fact that Powell was not taking this inflation seriously was another factor that contributed to the rally.
However, one has to be cautious and consider whether the Fed may cut interest rates if macroeconomic data continues to be as positive as it is now. Stronger labor market numbers, stronger GDP and increased retail sales are inflationary indicators and do not leave much room for the Fed to adjust interest rates. In theory and practice, interest rates are lowered when something is broken. So far, the data doesn't look like that's the case.
In light of these events, a Fed interest rate cut would be an ill-advised move that could put further inflationary pressure on the economy and destabilize markets. It is therefore important that the Fed takes action based on real economic indicators.
Importance of the situation in Japan and why it affects global markets
The eyes of the investment world are now also on the situation in Japan and their central bank - the Bank of Japan (BOJ). After 17 years, the BOJ has decided to raise interest rates from negative levels and has hinted at the possibility of further increases. The reasons for this move are linked to rising inflation and the extreme devaluation of the Japanese yen. Japan is in an economic recession, which adds gravitas to the whole situation.
So why is the situation in Japan so important? Large economies are interdependent, and this is particularly true of the US and Japan. The increase in interest rates in Japan has implications for the global market, particularly in terms of the Carry Trade strategy. This trading mechanism allows institutions to borrow at low interest rates in one country and invest in high-yielding assets in another country. However, rising interest rates in Japan complicate this strategy and may lead to greater volatility in the markets.
It is therefore important to monitor how the situation in Japan develops and what the implications will be for global markets. If the BOJ continues to raise interest rates, this may affect investment strategies and the stability of markets around the world. Markets should be aware of this risk and take it into account when planning their investments.