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Fed’s November Rate Hike Comes into Focus as Markets Prepare for End of Tightening Cycle

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Markets anticipate a potential rate hike in November as they downplay the significance of the Federal Reserve’s upcoming meeting in September. While the November meeting may hold the key to ending the tightening cycle, traders and policymakers seem to be in agreement that there is one more rate hike to come. This consensus is reflected in futures markets, which briefly showed a 60% chance of another policy rate increase to the 5.50-5.75% range by November 1, before retreating slightly due to reports of declining consumer confidence and job vacancies.

Throughout this year, markets have consistently projected a yearend rate for 2023 that is higher than what Fed futures rates indicate. However, the Federal Reserve’s accurate predictions and confidence in the economy have caused investors to align more closely with their thinking. The Atlanta Fed’s real-time estimate of U.S. economic growth for the current quarter stands at an impressive 5.9%, the highest since January last year. Despite the Fed’s tightening of interest rates, inflation has fallen, labor markets remain tight, and real wages continue to rise, buoying demand.

Although the September meeting is seen by some as a ‘dead rubber’ where the Fed will gather more data before making a decision, it could still be significant. The meeting will see the publication of the Fed’s updated ‘dot plot,’ which will indicate where policymakers see the cycle crest. Given the Federal Reserve’s accuracy thus far and its faith in the economy’s resilience, this forecast will likely carry weight. If the Fed maintains its current course, the median dot could suggest two more rate hikes by the end of the year, bringing the rate to 6%. Furthermore, the Fed’s assumption of a 130 basis point drop in the policy rate to 4.3% through 2024 may be revised to show a shallower decline or even no decline at all.

However, there is increasing disagreement among Fed policymakers regarding the underlying strength of the economy and the stickiness of inflation. This suggests that the Fed’s guidance may not be as clear-cut as it appears. Some skeptics doubt the possibility of a ‘soft landing’ and argue that avoiding a recession this year does not necessarily guarantee a long expansion. JPMorgan economists Bruce Kasman and Joseph Lupton point out that sustained economic expansion following synchronized tightening across developed economies is rare. They argue that for the US to replicate past successes, businesses must continue to hire despite slowing profits, the Fed must be willing to ease within six months of the last hike (which seems unlikely), and there needs to be a new supply-side growth impulse.

In conclusion, while markets seem to be aligning with the Federal Reserve’s thinking on future rate hikes, there are still uncertainties and potential challenges ahead. The upcoming September meeting and the release of the Fed’s updated dot plot will provide further insight into the central bank’s projections. It remains to be seen whether the Fed’s predictions will prove accurate and whether the US economy can sustain a long expansion after a period of tightening.

More detail via Reuters here… ( Image via Reuters )

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