Are 2 More Rate Increases Realistic? Probably Not

Several strategists are not sold on the Fed’s two-hike scenario, while the futures market expects just one.


Did not see that one coming.

Make that two, as in the number of additional quarter-point raises in the rest of 2023 that the Federal Reserve’s policymaking panel signaled Wednesday.

But there is significant skepticism among strategists and futures investors that this will happen. The benchmark rate, which the Fed left unchanged Wednesday, is now in a band from 5.0% to 5.25%.

The Federal Open Market Committee indicated that its short-term interest rate benchmark would be in a range of 5.5% to 5.75% by year-end, implying two separate increases of a quarter percentage point each, or one half-point boost. Of the 19 committee members, 12 projected the rate to hit that level—using a scatter-plot graphic called the “dot plots.” But their written statement was less hawkish.

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At his news briefing Wednesday, Fed Chair Jerome Powell said the committee expects further tightening would be appropriate “somewhat further” in 2023, although he did not detail by how much. Fed policymakers skipped an increase at their meeting this week to assess how their steady rate-raising campaign since March 2022 is playing out in the economy and in reducing inflation.

Come December, the futures market gives 45% odds of one hike, to a 5.25%-5.5% band, while 38% believe it will stay the same as now.

In a research note, Jeffrey Roach, chief economist for LPL Financial, noted that the FOMC statement said “policy firming that may be appropriate. They do not say more tightening will be appropriate.”

Bloomberg economists called the dot plots “a jawboning tool” designed to tamp down hopes for rate decreases. It anticipates that the actual increases will be lower than the dot plots suggest.

In the eyes of Ronald Temple, chief market strategist at Lazard, the dot plots may be misleading and any boosts unlikely to occur: “The Fed is clearly signaling that rate cuts are not on the near-term horizon. Reluctance to signal an end to rate hikes makes sense, given both the higher core inflation estimates.”

At most, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics, the Fed will do one more increase. He wrote: “By September, we think the case for further hikes will have weakened markedly, so a July hike will be the last.”

Beyond all this, the enormous surge in rates over the past 15 months is a lot more drastic than two more quarter-point rises, in the view of Charlie Ripley, senior investment strategist for Allianz Investment Management. He stated that “another one or two rate hikes should not do much to change the trajectory of the economy, and the bar to raise rates further down the road is likely to get even higher.”

 

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