Market Insight – FOMC Preview

The US Federal Reserve is set to announce its interest rate decision and release the revised Summary of Economic Projections, the so-called dot plot, on Wednesday.

Currently, the CME Group FedWatch Tool shows that markets are pricing in a nearly 70% probability that the Fed will hike its policy rate by 25 bps.

It should be noted that markets expect the Fed to raise its policy rate by 25 basis points to the range of 4.75-5% but there are too many uncertainties surrounding the US central bank.

The outside risk of a 25 bps rate cut seems a bit far-fetched in my view but if it does really happen for whatever reason, I think such a scenario could just cause extreme panic and fear in markets and the Fed knows this.

Prior to the banking issues the Fed anticipated that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy.

Seeing as inflation was rising they need to increase rates as sufficiently restrictive to return inflation to 2% and that restoring price stability will likely require a restrictive stance of monetary policy for some time.

Fed Chair Powell also told the US Congress the Fed is prepared to increase the pace of rate hikes if the totality of the data were to indicate that faster tightening is warranted.

Powell also noted that the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.

In my opinion, the FED still has not defeated inflation, and there are still no indications that any banking issues will lead to disinflation fast. So a rate hike does seem likely on Wednesday.

The ECB emphasized that there is no trade-off between inflation and financial stability risks, and I expect the Fed to deliver a similar message on Wednesday.

As long as the economic data remains strong, expect an interest rate hike of 25 basis point and the terminal rate at 5.00-5.25%.