Fears of a recession (a temporary period of economic decline during which trade and industrial activity are reduced, typically identified by a decline in GDP in two successive quarters) and stagflation (an economy experiencing a simultaneous increase in inflation and stagnation of economic output) are pervasive. Global market mood has already been badly influenced by geopolitical uncertainties, rapid rate increases, and growing inflation.
Over the coming days, the markets will process the US Fed's action. The July Federal Open Market Committee meeting of the US Federal Reserve began today. The meeting's outcome will be announced on Thursday by Chairman Jerome Powell.
The pattern of future estimate downgrades by large international corporations has increased worries about the world economy. Recession fears were exacerbated by the Fed meeting, which is anticipated to maintain its aggressive 75 bps rate hike. However, because the USD is the primary reserve currency, the Fed's decision is likely to have an impact on the entire world.
Even if the local markets may be displaying signs of strength, the western market's spillover effect cannot be avoided. On July 27, the Fed is anticipated to raise rates by 75 bps to 100 bps, bringing the Fed funds rate from 2.25 bps to 2.50 bps (In the United States, the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralised basis)
The Fed has a challenging balancing act ahead of it because the likelihood of a recession and the possibility of stagflation are both increasing. The Fed must ensure its rate hike won't cause a hard landing on the world economy because China and Europe are dealing with slower growth. Analysts anticipate that the US central bank will become more active in its efforts to rein in the inflationary escalation that reached 9.1% in June, the highest level since 1981. Most analysts predict that the US central bank will increase interest rates on Wednesday by 75 to 100 basis points.
The US Federal Reserve has already increased interest rates by 150 basis points in 2022, and an additional 200 basis points are anticipated throughout the remaining months of the year, according to IANS. This would equate to an overall rate increase of nearly 350 basis points in 2022, making it the most aggressive rate hike cycle ever.
Looking South of the Zimbabwean border, South Africa’s rand firmed as the dollar weakened against a basket of major currencies ahead of the U.S. Federal Reserve policy meeting on Wednesday. At 1627 GMT, the rand traded at 16.8100 against the dollar, 0.16% stronger than its previous close.
Should the Fed deliver a 100 bp hike this week, the rand will likely weaken, while a more minor move 50 bp could see the rand strengthen according to Economic Analyst Gerald Macheka