FOMC Meeting: The Last Hike? – Orbex Forex Trading Blog

There is a near-unanimous consensus that the Fed will hike rates at the conclusion of the FOMC meeting tomorrow. What could move the markets, therefore, is a little more complicated. The accompanying statement followed by Fed Chair Jerome Powell’s comments could be determinant for how markets perform. And then the very next day is the release of key US GDP data.

All eyes on September

The main issue is, once again, the difference in views between the market and the Fed. Following the last FOMC meeting, the Fed was saying there would be 2 more rate hikes this year, which would push the terminal rate up to 5.50%. The market, on the other hand, believes the Fed will only hike once more this year, which will be tomorrow.

To be fair, there are some people in the Fed who also agree. 4 of the 16 FOMC members expect rates to remain unchanged after tomorrow. Investors will be keen to see whether that number changes with the release of the dot-plot matrix. An increase in the expectation that the Fed won’t hike again would, naturally be seen as dovish.

Where the surprises lie

The other issue is not just about whether or not there will be a hike, but when. Economists have worried that the aggressive hiking by the Fed has left the economy vulnerable to a downturn. After “skipping” a rate hike at the last meeting, the Fed could opt to raise rates now, and then pause again. That would mean no rate hike in September, but then one in November. The end rate is the same, but the slower rate of increase could be seen as a “moderation” by the markets.

The baseline scenario is that the Fed will maintain its forecast of another rate hike after this one. It is very, very unlikely the Fed will forecast more rate hikes than that, since it would imply consecutive hikes. And inflation has been coming down.

Why keep things going?

While it’s true that inflation has come down substantially, it’s still not in the range of the target. Other central banks have paused and then had to restart hiking as inflation popped back up again. The Fed is intensely worried about its “credibility” in bringing inflation down and would very much like to avoid having to restart hikes.

Especially considering that the current estimate among economists is that the economy is still growing. Q2 GDP is forecast at 1.8%, a little down from the 2.0% in the first quarter. The Fed’s own predictions see GDP of 2.4% annual growth. That still affords room to keep tightening. Particularly with the labor market remaining strong.

The bottom line for the market is likely to be how strong the rhetoric is for a hike in September. Some have argued that the Fed will want to do two consecutive hikes now to get it over with, and then hold. Others point to the Jackson Hole symposium, which occurs in the “break” of August. Typically, that’s when the Fed adjusts to a new policy direction. Which means the Fed could be especially vague in its forecast language this time around, giving more volatility to the markets.

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• Source: https://www.orbex.com/blog/en/2023/07/fomc-meeting-the-last-hike