The Fed (aka the FOMC ) is scheduled to decide on US interest rates this Wednesday and according to JP Morgan they should consider pausing the rate increases.
On Wednesday, the Fed should provide more clarity on the trajectory of rates after vacillation in market expectations over the past month, which we illustrate in this week’s chart. As of Friday, the federal funds futures market was pricing in a 28% probability of a hike in June and a 54% chance of a skip in June followed by a hike in July. Since the FOMC last met, expectations have oscillated due to resilient growth, moderating inflation, diminished threats from regional banking turmoil, a solution to the debt ceiling standoff and mixed messages in the public pronouncements of Fed officials.
Given a gradual slowdown in growth and inflation and the fact that we have yet to see the full effect of the cumulative 500bps of hikes so far, the Fed would be well advised to pause at this point. Nevertheless, another hike is still clearly on the table and, if the Fed doesn’t hike this week, Chairman Powell will likely emphasize that skipping a rate hike now does not necessarily imply that the Fed is done raising rates. However, regardless of the Fed’s decision and messaging this week, we expect to see rate cuts within the next year that should improve the backdrop for investors across a broad range of assets.
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