The recently released Federal Reserve meeting minutes from July hint at the possibility of a rate hike in 2023, potentially around November. While the Fed’s focus remains on policy firming rather than rate cuts. Market sentiment appears divided on the likelihood of such hikes.
The minutes indicate that the Fed is mindful of finding a delicate balance between tightening policy adequately and avoiding excessive tightening.
There’s an optimistic outlook on inflation, with the expectation that incoming data will provide clarity on the ongoing disinflation process. Post-July meeting data, especially inflation figures, has generally been positive.
However, market perception doesn’t entirely align with the Fed’s stance. The CME Fedwatch Tool, driven by interest rate futures, estimates a 90% probability of steady rates in September. With only a 20% chance of a November hike.
Markets seem keen to wait for inflation data before drawing conclusions. As the Fed refrains from predicting data they haven’t yet seen. While medium-term interest rate hikes have been underestimated before, market predictions of meeting outcomes have been largely accurate.
Fed Interest Rate Hike Forecast
Inflation remains a focal point for the Fed, with core CPI and trimmed mean inflation both indicating rates over 4%, surpassing the Fed’s 2% target. The Fed’s concerns lean towards unexpected inflation increases rather than decreases, given the memory of the inflation era in the 1980s.
Although unanimous decisions on rate hikes have been reached, some participants advocate keeping the federal funds rate unchanged.
This highlights potential disagreements in fine-tuning rates, emphasizing the importance of Fed Chair Jerome Powell’s ability to foster consensus in future decisions.
As the September 20 rate-setting meeting approaches, the market eagerly anticipates more inflation and unemployment data. Powell’s upcoming speech on August 25, akin to last year’s significant Jackson Hole address, could provide valuable insights into the broader monetary policy landscape.
While most Fed members foresee another 2023 rate hike, market conviction is less steadfast. Both parties concur that peak interest rates are nearing, with a probable moderation expected in 2024. As the market navigates these nuances, only time will reveal the true trajectory of interest rates.