All eyes on the Fed
The market thinks the Federal Reserve will hold rates steady at this Wednesday's meeting. But inflation hawks are still betting on one more hike later this summer.
It’s probably still too soon for the Federal Reserve to declare victory in its war against inflation. But the market is betting that the central bank will pause this week following a series of interest rate hikes that began in March 2022.
Rates were at 0% for two years, following the Fed’s decision to slash them during the start of the Covid-19 pandemic. They are now in a range of 5% to 5.25%. According to the CME FedWatch Tool, traders are pricing in about a 75% chance that Jerome Powell & Co. will leave rates there after Wednesday’s Federal Open Market Committee meeting.
But all bets are off after that. There are more than 50% odds of a quarter-point rate hike in July and about a 50% chance of another pause in September. The market is then starting to price in the possibility that the Fed will cut rates in November and December.
The interest rate confusion (former Fed chair Alan Greenspan might call it a conundrum) is a clear sign that investors, consumers and policy makers aren’t really clear about where the economy is heading.
One prominent investment firm isn’t convinced that the Fed is ready to pivot from inflation-fighting mode to rate cutting just yet.
“We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” said Asawari Sathe, a Vanguard senior economist, in a recent report. “In that scenario, the Fed cutting its policy rate this year is unlikely.”
“Our model suggests that it’s nearly three times as likely that the Fed will raise its target for the federal funds rate or keep it on hold this year than that it will cut rates,” she added.
The case for continued hawkishness does have some merit. After all, the job market remains relatively robust despite layoffs in tech, media, finance and other pockets of the economy. The housing market appears to be stabilizing after a mini slump brought about by sky-high prices and rising rates. Recession concerns have begun to die down a bit as a result.
So investors are going to need to pay close attention to what the Fed says Wednesday in order to get a better sense of where rates might be heading next. It will be a bigger data dump than usual.
In addition to the Fed’s statement at 2pm ET and Powell press conference beginning a half hour after that, the Fed will also release its latest series of economic projections. Traders will be looking at the so-called dot plot that shows where individual Fed members think rates are heading, as well as new forecasts for unemployment, GDP and inflation for the rest of this year, 2024 and the longer-term.
In the immortal words of former NFL star Terrell Owens: Get your popcorn ready!