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Preview: FOMC meeting - why wait?

With the Federal Reserve Funds rate at its highest since 2007, a 'hawkish pause' is widely anticipated this week. Yet, several key developments suggest the market may be underpricing the risk of a June hike.

Source: Bloomberg

In its last meeting in May, the FOMC raised the Fed Funds rate by 25bps to a range of 5-5.25% - its highest level since September 2007. While a tightening bias was retained, the Committee noted readiness to adjust the monetary policy if necessary.

The minutes from the meeting confirmed the door was open for a pause, highlighting that members were divided about whether additional rate hikes would be necessary. As stated, “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”

Federal funds effective rate chart

Source: Board of Governors of the Federal Reserve System (US)

What can we expect this Thursday?

On Thursday, the Fed is widely expected to deliver a hawkish pause before another 25bp rate hike in July. This is based on comments from six of the eleven FOMC voters who have spoken in favour of pause, including the key leadership duo of Fed Chair Powell and Vice Chair Jefferson.

Target rate probabilities for the 14 June 2023 meeting

Source: CME Group

The median dot is expected to show one additional hike to a peak of 5.25%-5.50%.

Source: CME Group

Why wait?

Since the May meeting, several notable developments have occurred, which beg the question, why wait?

  1. The debt ceiling was raised before the X-date avoiding costly disruptions
  2. The impact of the banking crisis has been less meaningful than feared
  3. Core PCE increased by 4.4% YoY from 4.2% previously
  4. Non-farm payrolls increased by a robust 339k in May
  5. Two early pausers, the RBA and the BoC, hiked rates last week
  6. Financial Conditions continue to ease.

As such, we think the market is under-pricing the risk of a hike in June and then a pause in July. More so given the possibility of a hotter-than-expected inflation print this evening.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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