Has the Fed Paused?

The Fed raised short-term interest rates by another quarter percentage point today to a range of 5.00 – 5.25%, just like most analysts and investors expected. In addition, policymakers made changes to its official statement that hint that this rate hike might be the last of the cycle.

In particular, the Federal Reserve removed language from the previous statement that it “anticipates that some additional policy firming may be appropriate” and a reference to “future increases” in the target range. Now the emphasis in the statement is that further rate hikes “may be appropriate” with no reference to “future increases” in the target range. In reaction, the futures market is pricing in no more rate hikes
this cycle and for cuts to start in September, with about three or four quarter-point rate cuts by the end of January 2024.

By contrast, we think inflation will remain more elevated than the Fed projects and that the Fed will likely raise rates at least one more time this cycle. In addition, we believe the process for starting rate cuts is further off than the futures market suggests. Chairman Powell himself, at the post-meeting press conference, poured cold water on the prospects of rate cuts, assuming the economy develops as the Fed

Yes, headlines are full of stories about banking turmoil, but the Fed and FDIC have, at least temporarily, ring-fenced
traditional banks, guaranteeing deposits in FDIC-insured accounts, potentially no matter how high. This will prevent bank runs, kicking the can down the road for future policymakers to deal with the problem. Meanwhile, although we believe a recession is coming it isn’t here yet.