The central bank is widely expected to announce a 75 basis point rate hike on Wednesday afternoon. "I understand why it's being priced in but, from a pure trading standpoint, you could see a big piece of that reverse today after the press conference," Merlis said.īlackRock's Rick Rieder said he anticipates the Federal Reserve will raise rates by 0.75 percentage point Wednesday and two more rate hikes may be in the cards before the central bank stops. The CME's FedWatch tool shows a 100% chance of the Fed funds rate being at 3% or higher by December, before declining to roughly a 75% chance of that in July 2023. In fact, some traders have started to price in rate cuts next year, anticipating a pivot from the Fed. I think that people in the market are looking for them to pull back and slow down the hawkish nature of their general commentary, and I think this meeting they're going to be disappointed," said Eric Merlis, managing director, global markets at Citizens Financial. "I think the Fed will be more hawkish than dovish.
However, Fed Chair Jerome Powell took an aggressive stance against inflation at the last meeting, and he could do so again on Wednesday. Signs of an economic slowdown have led to speculation on Wall Street that the central bank may soon take its foot off the gas of its rate hikes in an attempt to avoid a recession. Stocks and bond prices have rallied in the weeks leading up to Wednesday's expected rate hike, which could put markets at risk for a backslide if the Federal Reserve holds course. She expects that rates will rise above 4% next year before a recession hits, potentially opening the door for rate cuts in late 2023. "However, with the labor market still a picture of strength, wage growth still uncomfortably high and core inflation set to decline at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it downshift gears too much." "From here, it is possible that the Fed slows its tightening pace, reassured by the likely peaking of inflation and pullback in inflation expectations as oil prices have fallen," Shah said. Still, the central bank's next move may not be as large as the hike Wednesday. "Combatting four-decade high inflation will take a sustained show of strength from the Fed, rendering a soft landing an almost impossible pipe dream," said Shah. They'll need to continue to tamp down inflation, she said. The current interest rate hiking cycle is swiftly proving to be one of the Fed's most aggressive in recent decades, Seema Shah, chief global strategist at Principal Global Investors said. "They knew this was something the market would pay attention to, and they want to take sure we notice they acknowledge the slowing down of the economy" as a result of their policy, she said.
She said it was a positive the statement reflected that the economy was slowing, and the fact that it will be data dependent going forward.
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Powell said that the Fed could slow rate hikes in the months ahead and said that there could be some more financial tightening "in the pipeline" from the hikes that have already been made but maybe haven't taken full effect yet throughout the economy.Ĭhaudhuri said the market was reacting to several things, including the fact the Fed stuck to a 75 basis point hike and did not go more aggressively.
The recognition is something we heard today that we didn't hear before." "They're recognizing there are two sides of this – there's a growth tradeoff to fight inflation. "I think the reason this is providing some relief to the equity market is the Fed is acknowledging that there can be an impact on growth, to the economy, based on their policy," said Gargi Chaudhuri, head of BlackRock's iShares investment strategy, Americas.
Jerome Powell has signaled that the Fed is aware of the negative impact of its rate hikes on the economy, which is boosting stocks on Wednesday afternoon, according to a strategist at BlackRock.
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