FOMC: The Last Hike for Fed?

The near-unanimous consensus is that the Fed will hike by a quarter of a point, with the vast majority of traders expecting it to be the last hike of the cycle.

One and Done or More to Come?

Almost 99% of traders expect a 25bps hike from the Fed tomorrow, with a few dissenters expecting 50bps. After that, over 60% of traders expect rates to remain unchanged throughout the year, rejecting the Fed's projections of another rate hike. Since the consensus is solid, markets will likely look to the statement to see what clues are given about the September meeting. Fed Chair Jerome Powell's post-rate decision will also probably be highly scrutinised, given his propensity in the past to say things that the market interprets as being different from the statement.

At the last meeting, Powell's refusal to cause the hold a "skip" was interpreted as more dovish by the markets until he provided testimony before Congress affirming the position of the FOMC statement. If the Fed hikes this time around, it would imply that the last meeting was, in fact, a "skip". Powell has gone to great pains lately to emphasise that consecutive hikes were just as likely as non-consecutive ones, to leave open the possibility of a slower rate hike trajectory for the rest of the year.

What Could Shake Up the Markets

The anticipation is that the Fed will likely not want to communicate that the rate cycle is over, as that would be seen as allowing inflation to return. CPI change is still above target, and even if the Fed were to pause in effect, the statement from officials would likely communicate that more rate hikes were a strong possibility. The Fed doesn't see inflation returning to target this year, and while that doesn't happen, it will want to keep the threat of more hikes active. Similar to other central banks that have already "paused", there wasn't an official statement to that effect, but simply not hiking and saying that the central bank will evaluate the data as it evolves. Markets have gotten used to disagreeing with the Fed, lately, forecasting fewer hikes than the Fed. So the Fed reiterating its current position is unlikely to be a major shake-up for the outlook.

If the summary of opinions suggests that a majority no longer see two rate hikes this year, it could be seen as a significant dovish move. The main focus for traders will likely be the September meeting. Just how insistent the statement and Powell are on the potential for another hike could determine rate expectations going forward. Between now and the September hike is the Jackson Hole symposium, which is usually the venue for a change in the Fed's policy outlook. That could keep traders' views about where things are going in check.

In an unusual circumstance, the FOMC meeting is one day before the first look at US GDP figures for the second quarter. The US economy is expected to have slowed down its growth slightly to 1.8% annualised from 2.0% reported in Q1. By contrast, the Fed's GDPNow forecaster expects an annual rate of 2.4%.

Dow Breaking Higher

Wall Street has broken a triangle pattern upwardly, opening up the measured-move projection high at 37200. Bulls must reclaim 37k and the shorter-term resistance at 35880 for any chance at record highs. Sliding under 34930 will increase the risk of further drawdowns, with 33608 as a last resort before invalidation at 32680.

Source: SpreadX / WALL STREET

Key Takeaways

While almost 99% of traders expect a 25bps hike, over 60% believe rates will remain unchanged throughout the year, contrasting with the Fed's projections. The Fed will likely avoid signalling the end of the rate cycle to prevent inflation from returning. Powell's previous statements have been scrutinised for discrepancies with the official statement. If the Fed hikes this time, it would imply that the previous meeting was a "skip," contradicting Powell's recent emphasis on consecutive and non-consecutive rate hikes. The focus will shift to the September meeting and how strongly the Fed communicates the possibility of another hike. The Jackson Hole symposium before the September hike may influence traders' expectations.