Tomorrow brings the latest Federal Reserve decision, with another quarter-point hike viewed as a slam dunk – current market pricing shows a 93% probability of that outcome. That would bring the Fed Funds rate up to a range of 5-5.25%, which is what their “dot plot” projection from the March meeting indicated would be the likely peak for this cycle. Looking ahead to the following meeting in June, the odds of an additional hike are only 13.5%. In other words, the market is pricing a significant probability that the Fed will be done hiking rates after tomorrow.
There are several factors that make the Fed’s decision-making much more complicated going forward. First of all, progress is being made on inflation with CPI falling from a peak of 9.2% last summer to 5% currently. That’s still not low enough for their liking but is clearly heading in the right direction. Secondly, parts of the economy have been slowing and calls for a recession are growing louder. Third, the lagged impact of their prior tightening over the past 14 months has resulted in four major bank failures in short order, with First Republic being the latest to succumb over the weekend. The extent to which the banking crisis will weigh on future lending activity remains unclear but adds to the economic headwinds.
And last but certainly not least, a major political battle over raising the debt ceiling looms. Yesterday, the Treasury warned that the so-called “X-date” when it officially cannot pay all of the government’s bills may be as early as June 1st, but there are scenarios where it might extend further into the summer. If the debt drama does stretch until June 14th when the Fed next meets, then Chair Powell & Co. may be reluctant to add any additional fuel to that fire with more rate hikes.
From a messaging standpoint, the Fed may still try to avoid uttering the word “pause” tomorrow, but for a number of reasons it sure seems like this rate hiking cycle is finally on its last legs.
Sources: CME Group as of 5/2/23
Carl Noble, CFA®
Senior Vice President of Investments
Congress Wealth Management LLC (“Congress”) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. For additional information, please visit our website at congresswealth.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Congress’ CRD #310873.
This note is provided for informational purposes only. Congress believes this information to be accurate and reliable but does not warrant it as to completeness or accuracy. This note may include candid statements, opinions and/or forecasts, including those regarding investment strategies and economic and market conditions; however, there is no guarantee that such statements, opinions and/or forecasts will prove to be correct. All such expressions of opinions or forecasts are subject to change without notice. Any projections, targets or estimates are forward looking statements and are based on Congress’ research, analysis, and assumption. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. This note is not a complete analysis of all material facts respecting any issuer, industry or security or of your investment objectives, parameters, needs or financial situation, and therefore is not a sufficient basis alone on which to base an investment decision. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this note. No portion of this note is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Investing entails the risk of loss of principal.