On Wednesday afternoon Eastern Time, the Federal Reserve approved a 25 basis point rate hike, marking the 11th rate hike in 17 months and pushing the federal benchmark borrowing cost to its highest level in 22 years.
Investors are watching for signs that this may be the last rate hike of this cycle. Although policymakers indicated at the June meeting that there would be two more rate hikes this year, the financial markets have already priced in the possibility that there will be no more rate hikes this year.
The S&P 500 index closed basically flat on Wednesday, while the tech-heavy Nasdaq index edged lower. The Dow extended its winning streak for the 13th consecutive time, rising 82 points or 0.2%, marking the longest winning streak since January 1987. BTC rose 0.8% in the past 24 hours, trading at $29,470. Ethereum rose slightly by 0.5%.
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Additional policy tightening
A recent survey of 106 economists by Reuters showed that most respondents expect today’s rate hike to be the last of this cycle, but the Fed’s forecasts suggest otherwise.
Matt Kunke, an analyst at cryptocurrency trading firm and liquidity provider GSR Research, pointed out that the Federal Reserve’s Summary of Economic Projections (SEP) in June showed that the median forecast of Fed officials was for two more rate hikes this year. Kunke said, “The market has not fully embraced this view and continues to imply a higher probability of one rate hike (about 65%) compared to two rate hikes (about 27%).”
Powell said at a press conference that the Fed has not made any decisions on future rate hikes, but he made it clear that the fight against inflation is not over.
Data released by the U.S. Labor Department showed that the year-on-year inflation rate in June was 3%, a significant drop from its peak of 9.1% in June 2022. However, the “core” inflation measure favored by the Fed, which excludes volatile food and energy costs, still grew by 4.6% compared to the same period last year in May.
The post-meeting statement from the Federal Reserve said, “The Committee will assess the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and economic and financial developments.”
Some Fed officials, including Board of Governors member Christopher Waller and Dallas Federal Reserve Bank President Lorie Logan, believe that the cumulative effects of previous rate hikes have been incorporated into the economy. Given that inflation is still above the Fed’s target, they believe that further rate hikes may be necessary to further alleviate price pressures.
Fed Chairman Powell reiterated this point at the press conference, saying that if the data shows it is necessary, there may be further rate hikes in September. He said, “We may choose to keep rates unchanged at that meeting, but as I said, we will carefully assess at each subsequent meeting.”
Unlikely to Cut Rates This Year
Powell also mentioned that inflation has slowed since the middle of last year, but there is still a long way to go to reach the Fed’s target of 2%. He believes that the economy will achieve a soft landing and it is unlikely to cut rates this year.
Powell pointed out that some participants of the Federal Open Market Committee (FOMC) have included rate cuts in their economic forecasts for next year, but he said, “This is the judgment we have to make, how confident are we that inflation will actually get back to 2%?”
Powell still believes that the Fed can lower inflation without causing a sharp economic downturn, although he said, “We still have a long way to go to be confident about that.”
When asked about rate cuts next year, Powell said it would be a “judgment” based on their own “confidence”.
How do professionals interpret this?
Gurpreet Gill, Global Macro Strategist at Goldman Sachs Asset Management, said on Wednesday that any new signs of inflation could mean a longer path for rate hikes by the Fed. Given the uncertainty surrounding the end of this rate hike cycle, Gill said that if more progress is made in lowering inflation, it will limit the rise in US Treasury yields. If inflation continues to cool, the 10-year Treasury yield may even decline. However, a strong labor market and economy will potentially slow down the potential decline in yields.
Gill said, “Today’s Fed meeting is one of the most certain and uncertain meetings in this cycle. The 0.25% rate hike has been fully digested and widely expected by forecasters and investors. However, there is still disagreement among investors as to whether this marks the end of the current tightening action.”
In a report to clients, Goldman Sachs stated that the Fed’s statement does not imply a slowdown in future rate hikes, but the bank expects a rate hike in September.
Angelo Kourfafas, Investment Strategist at Edward Jones, said, “The message conveyed to the market is that it didn’t do anything to push it. People are always worried about major surprises.”
Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management, said that Powell’s message is clearly that the Fed will wait for economic data to make new decisions. “I don’t think the Fed will stop unless they see wage inflation decline.”
Phillip Colmar, Global Strategist at MRB LianGuairtners, said, “Where the market is mispricing is in the expectation of a significant rate cut next year. If there’s anything different, it’s the need for further rate hikes.”
Quincy Krosby, Chief Global Strategist at LPL Financial, said, “If the data-dependent Fed believes it necessary, this statement opens the door for another rate hike, but the tone of the statement is more neutral rather than clearly dovish or hawkish.”
Lex Sokolin, Managing Partner of Web3 investment fund Generative Ventures, said that the Federal Reserve’s statement “will not change the narrative around cryptocurrencies. We are already in a risk-off environment. With the Russia-Ukraine war or a US economic recession, things could become more catastrophic, but the valuations of technology and finance are relatively stable, and artificial intelligence could be an outlier.”
Sokolin expects “a few more rate hikes,” but “the most challenging work, namely absorbing the supply chain impact of the COVID-19 pandemic and related money printing subsidies, has been completed.”
Author: LianGuaiBitpushNews Mary Liu
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