Rate hikes may no longer serve any good, but other options are limited

Dark clouds are gathering in the economic world. Both investors and currency traders are holding their breath to see what the US Federal Reserve will do on Wednesday, June 14th.

Will the policy rate be raised again, increasing the risk of the United States economy being slowed down to the extent that a recession looms? Or will there be no interest rate hike?

In the latter case, the danger is that the US central bank will later have to take much harsher measures to control inflation.

Surprising interest rate hikes in Canada and Australia

A few weeks ago, the financial world was not at all focused on the US interest rate decision. Inflation was decreasing, and an economist poll on the CME exchange platform indicated that there was only an 8.6 percent chance of an interest rate hike.

However, within a week, the sentiment has changed. And it all has to do with what happened in Australia and Canada.

The Australian central bank, after three months of staying put, unexpectedly raised interest rates last Tuesday. That came as a significant surprise, reflected in a 1.5 percent rise in the Australian dollar.

A day later, the Canadian dollar reached its highest level in almost five months. Shortly after the central bank of Australia, the Bank of Canada also unexpectedly raised interest rates by a quarter percent. And, just like in Australia, this higher interest rate led to an influx of international capital.

What will the Federal Reserve do?

Due to the interest rate hikes in Australia and Canada, investors suddenly pay more attention to the possibility that this may also happen in the United States.

Inflation in the United States is still relatively high, while the labor market has been quite tight for some time. However, it is far from certain that the Federal Reserve will attempt an interest rate hike.

For example, last Thursday, it was announced that 261,000 Americans had applied for unemployment benefits. That’s more than the 235,000 economists had expected, suggesting that the need to slow down the economy may be less significant than it appeared for a while.

If there is an interest rate hike in the US on Wednesday, it will have two consequences. Firstly, there is a good chance that the US dollar, following the Australian and Canadian dollars, will receive a boost from higher interest rates. But equally important is that the financial world will clearly receive the message that the specter of inflation is far from being dispelled.