The market’s focus early this week will be on the Tue/Wed FOMC meeting. After the meeting concludes on Wednesday, Fed Chair Powell will hold his usual press conference, and the FOMC will also release its updated macroeconomic forecasts and its updated dot-plot forecast for the federal funds rate.
The markets are discounting virtually no chance that the FOMC at this week’s meeting will raise the federal funds rate from its current range of 5.25-5.50%. The FOMC has already raised its funds rate target sharply by 5.25 percentage points in just the past 1-1/2 years, which is the sharpest rate hike since the Fed pushed the funds rate into double-digits during 1978-82 when then-Chair Volcker was forced to declare an all-out war on inflation.
The Fed this week is also likely to leave rates unchanged since it is currently looking down the barrel of a UAW strike and a possible U.S. government shutdown on September 30.
For this week, the FOMC will likely be content to stand pat and assess whether the incoming data shows that another rate hike is necessary to slow demand and inflation. The markets are currently discounting the odds at 31% that the FOMC at its next meeting in November will implement a +25 bp rate hike, and at +13% for that +25 bp rate hike at the following meeting in December.
Starting in 2024, however, the markets are expecting the Fed to begin cutting its funds rate target in response to expected weakness in the economy and inflation. By the end of 2024, the markets are expecting the Fed to cut the funds rate by a total of -52 bp to 4.81% from the current effective federal funds rate of 5.33%. By the end of 2025, the markets are expecting the FOMC to cut the funds rate by a total of -112 bp to 4.21%.
The markets this Wednesday will key heavily on the Fed’s latest dot-plot to gauge the Fed’s thinking about whether another rate hike will be necessary and how long the Fed will need to keep rates above 5%. The Fed’s last dot-plot, released after the June meeting, predicted that the funds rate would end 2023 at 5.6%, which would imply one more +25 bp rate hike by the end of this year. That dot-plot then predicted that the funds rate would fall to 4.6% by the end of 2024 and to 3.4% by the end of 2025. The FOMC sees the longer-run funds rate at 2.5%, which implies an eventual 283 bp rate cut from the current level.
The markets are not expecting much change in this week’s dot-plot, but the markets would be pleased if the Fed would cut its end-2023 rate forecast from June’s 2.6%, or indicate larger expected rate cuts for 2024 and 2025. Still, the Fed wants to remain cautious and doesn’t want the markets to get ahead of themselves by becoming convinced that the rate-hike cycle is over. Therefore, the Fed this week will likely continue to project a mildly hawkish view.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
