Market participants are eagerly awaiting the upcoming two-day Federal Open Market Committee (FOMC) meeting Tuesday and Wednesday. A 25-basis-point rate hike to a target range of 5.25%-5.5% is fully priced in by the market. This move would mark the highest borrowing costs in over two decades.
Alongside the rate decision, market participants are closely watching for clues on whether this hike will be the last in the tightening cycle.
The latest market-implied probabilities as measured by CME Group’s Fedwatch tool assign a 16.7% chance of a further rate increase in September and a 35% chance of a further increase by November.
Here’s what economists and analysts are saying ahead of the interest rate call.
James Knightley, chief international economist at ING Groep NV, predicts the Federal Reserve will resume its policy tightening during the July meeting. ING predicts a 70% chance of a 25bp rate hike, emphasizing vigilance against inflation risks and potential further increases. A “dovish 25bp hike” has a 25% probability, indicating a possible rate peak, in the firm’s view. The chances of zero-basis-point and 50bp outcomes are each placed at 2.5% by ING. ING’s base case suggests no further hikes, with rates peaking at 5.25%-5.5%.
BNP Paribas economists, including Carl Riccadonna, Andy Schneider, Yelena Shulyatyeva and Andrew Husby, foresee the FOMC delivering the widely anticipated 25bp rate hike Wednesday. Fed Chair Jerome Powell is likely to maintain a tightening bias while emphasizing the policy rate is nearing a sufficiently restrictive level, the economists said. This stance would make the Fed more reliant on incoming economic data for future decision-making. BNP Paribas said the July rate hike will be the last of the cycle due to slowing economic activity, lagged effects of previous rate hikes, tightening lending conditions and mounting evidence of disinflation in the second half of 2023.
Greg McBride, CFA, chief financial analyst at Bankrate, highlights the disparity between headline and core inflation readings. The core CPI has decelerated from 5.9% to only 4.8% in the last year, and even the Fed’s preferred inflation measure stands at 4.6%, he said. Since the central bank’s inflation goal is 2%, McBride said he expects the Fed to emphasize there is still a considerable distance to cover. Whether interest rates will rise further beyond the July meeting will largely depend on inflation readings in the upcoming months, the economist said.
Win Thin, senior vice president and global head of currency strategy at Brown Brothers Harriman, highlights the importance of forward guidance during the FOMC meeting. He firmly believes the Fed should avoid signaling another rate hike skip in September. Given the strength of the labor market, Thin suggests the Fed should adopt a more data-dependent approach and emphasize that assuming a rate hike skip in September would be premature.
Produced in association with Benzinga