ZINGER KEY POINTS
The market has nearly totally discounted a 25-basis-point rate hike to 5.25%-5.5%.
Bank of America projects another rate hike in September.
Ex-Fed chair Bernanke says next Fed interest rate hike may be its last
The financial world is gearing up for the highly anticipated Federal Open Market Committee (FOMC) interest rate decision scheduled for Wednesday, July 26.
It’s almost a sure thing the Fed will raise interest rates by 0.25%, pushing the cost of money to 5.25%-5.5%, its highest level since February 2001.
What still remains uncertain is the Fed’s course of action after July. The words used in the Fed statement and Fed Chair Jerome Powell’s remarks next week could have significant implications for the stock market, depending on whether the Fed aims to raise rates further or not.
Fed’s July Meeting: Market Says Hike Is A Done Deal
The market has nearly totally discounted a 25-basis-point rate rise to 5-25%-5.5% at the Fed’s July meeting. This outcome has an indicated chance of 99.8%, according to the CME Group Fed Watch tool.
What remains unknown is the outcome of the September meeting, with a subsequent rate rise priced at an 18% probability. The odds of a hike to 5.5%-5.75% by the November are marginally greater, with the market probability hovering at 34%.
In its June macroeconomic predictions, the Fed’s median voter hinted at two more rate rises by year’s end.
The table below shows the market-implied probability of the Fed’s funds target rate for each FOMC meeting date as of Thursday. As we can see, the market expects a rate rise of 25 basis points to 5.25%-5.5% for the July 26 meeting, with a 99.8% chance. Subsequent meetings show varied probability for the level of interest rates, reflecting increasing uncertainty, with the first rate cut priced at the end of the first quarter of 2024.
Data Cements Progress On Inflation, Economy Remains Strong
On the inflation front, there have been some encouraging signs, but the Fed’s target has yet to be met. Core inflation fell faster than predicted to 4.8% in June, while overall inflation fell to 3%, the lowest level since March 2021. Producer-side inflation practically vanished, with PPI inflation printing at 0.1% in June, the lowest since August 2020.
Despite these favorable developments, a healthy economy is pushing back against premature rate cut hopes, leaving the chance of another hike well alive as we approach year-end.
The banking sector has recovered remarkably well from the March crisis, proving to be robust, stable and profitable.
Despite June’s somewhat disappointing nonfarm payrolls number, the job market remains tight, with the unemployment rate falling to 3.6%. Jobless claims totaled fewer than predicted last week, while the latest data on retail sales shows that consumers are still sufficiently confident for spending, with a 0.6% increase in core retail sales.
In contrast to the manufacturing sector, which showed symptoms of significant contraction in the most recent PMI survey, the service sector of the economy showed steady expansion.
In general, the economic climate may not be one that is encouraging Fed members to ease monetary policy. The prospect of another rate rise or of keeping rates on hold for longer will most likely remain after the July’s meeting.
Bank of America Says Fed Not Ready To Signal End Of Tightening
Bank of America’s economists predict that after the rate increase in July, the Fed will deliver another 25bp hike in September, resulting in a terminal target range of 5.5%-5.75%.
Bank of America’s Michael Gapen said he believes Powell will stick to his June economic estimates, which suggested that most members expected more than one hike before the end of the year.
“We do not think the Fed is ready to signal it is done with its tightening cycle,” BofA economists said in a note.
They also said the Fed does not want to be committed in any manner, anticipating that Powell will emphasize the Fed’s continuing data dependency.