Following the decision of the US central bank to refrain from raising interest rates last week, investors are now eagerly anticipating two more hikes that could push the federal funds rate to 5.6% by the end of the year, marking a 50 basis points (bps) increase from its current level. According to CME’s Fedwatch tool, market predictions suggest a 25bps increase during the upcoming Federal Open Market Committee (FOMC) meeting scheduled for July 25 and 26.
Federal Reserve Pauses, but 2 Rate Hikes Loom, 76.9% Probability of a 25bps Increase in July
After implementing ten consecutive rate hikes since March 2022, the US Federal Reserve decided to pause in June but acknowledged the likelihood of additional increases in 2023. Fed Chair Jerome Powell stated that “nearly all committee participants view it as likely that some further rate increases will be appropriate this year.” Currently, the federal funds rate is at a 16-year high, and although there was no increase in June, the impact of the previous ten hikes is evident among market participants.
Federal funds rate as of June 20, 2023, according to the Federal Reserve Bank of New York.
Inflation in the US has slowed down for eleven consecutive months but remains elevated at 4%, while the interest rate for a 30-year mortgage ranges between 6.99% and 7.14%. The nationwide average for a 30-year loan term is 7.08%. This implies that borrowers must pay $660 to $685 in monthly interest for every $100,000 borrowed. With the federal funds rate at 5% to 5.25%, two additional rate hikes totaling 50bps would likely result in higher lending rates, significantly tightening credit in the US.
During the press conference of the last FOMC meeting, Powell mentioned that the Fed board members did not reach a consensus on July. “We didn’t make a decision about July,” Powell informed reporters last Wednesday. “I do expect that it will be a live meeting. It may make sense for rates to move higher but at a more moderate pace, but we have made no decision about a hike or pause at the July meeting.”
Despite previous predictions of a shift, most market analysts do not foresee a rate cut this year. Asawari Sathe, Vanguard’s senior economist, expresses skepticism that the federal funds rate will be lowered in 2023. “We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” wrote the Vanguard economist. Vanguard’s machine learning prediction tool also predicts that the Fed will not reduce rates until the following year. Sathe stated:
Vanguard’s model anticipates that the Fed won’t be able to lower rates until mid-2024.
As of June 20, CME’s Fedwatch presented a 76.9% probability of the Fed increasing the rate by 25bps at the July FOMC meeting. Approximately 23.1% expect no change to occur in July, with the rate remaining unchanged at 5% to 5.25%. If the 5.6% target is achieved within this year, it will exceed the Federal Reserve’s previous March prediction by a significant 50bps.
CME Fedwatch tool as of June 20, 2023.
However, by the end of May, several economists began asserting that the central bank would undergo a significant shift in its approach. “Chair Powell right now does not want to talk about (reducing rates),” conveyed Ian Shepherdson, the chief economist at Pantheon Macroeconomics, to his clients just last month. The Pantheon executive added:
But that will change; the Fed will do what the data tell them to do, and the data are heading south.
What are your predictions for the Federal Reserve’s next moves? Share your thoughts and opinions about this subject in the comments section below.
Frequently Asked Questions (FAQs) about rate hikes
What are the expectations for the US central bank’s interest rates?
Following the recent decision to pause interest rate increases, there is anticipation for two more rate hikes by the US central bank. The target is to reach 5.6% by the end of the year, according to market predictions.
How many rate hikes have occurred so far?
Since March 2022, there have been ten consecutive rate hikes implemented by the US Federal Reserve. However, they decided to halt the increases in June, but additional hikes are anticipated in 2023.
What is the current inflation rate in the US?
The inflation rate in the US has decelerated for eleven consecutive months but remains elevated at 4%. This is an important factor influencing the central bank’s decision-making process.
What impact do rate hikes have on mortgage rates?
With the federal funds rate at 5% to 5.25%, two more rate hikes totaling 50bps would likely result in higher lending rates. This tightening of credit in the US would affect mortgage rates, making borrowing more expensive for individuals.
Is there a consensus on the upcoming rate hike in July?
During the last Federal Open Market Committee (FOMC) meeting, the Federal Reserve board members did not reach a consensus on a rate hike in July. However, market predictions indicate a 76.9% probability of a 25bps increase during that meeting.
Are there expectations for a rate reduction this year?
Most market analysts do not foresee a rate reduction this year. Vanguard’s senior economist, for example, expresses skepticism about the possibility of the federal funds rate being lowered in 2023. Their prediction tool suggests rate cuts may not happen until the following year.
How might these rate hikes affect the economy?
Rate hikes can have various impacts on the economy. They can help control inflation but may also lead to increased borrowing costs, tighter credit conditions, and potentially slower economic growth. The overall effects depend on the specific circumstances and other factors influencing the economy.
More about rate hikes
- Federal Reserve Official Website
- CME Fedwatch Tool
- Federal Reserve Bank of New York
- Vanguard Official Website
- Pantheon Macroeconomics Official Website