Fed Preview: Banks see a 25 bps hike as “a done deal”, focus on forward guidance

We expect the FOMC to raise interest rates by 25 bps taking the fed funds target range to 5.25-5.50%. That would leave the policy rate in line with our terminal rate forecast. Our adapted Taylor Rule suggests a 5.5% FFR is sufficient to return inflation to the 2% target. However, ongoing strength inactivity and labour market demand mean there are upside risks to this view. The future policy path is data dependent.

We expect the Fed to hike interest rates for the final time by 25 bps and then go on hold. While economic activity has still held up well, easing underlying inflation and declining inflation expectations limit the need for further rate hikes. We expect the immediate market reaction to be muted, with risks skewed towards a hawkish reaction, if Powell still maintains the door open for another hike. We see 10y UST yield at 3.50% and EUR/USD at 1.06 by the end of the year. 

The Fed is widely expected to resume policy rate increases following its decision to pause in June: We look for the FOMC to tighten rates by 25 bps. While we anticipate that July will bring the Fed's last rate increase of this cycle, we do not think the Fed is comfortable signaling that shift just yet. Rather, policymakers appear more comfortable maintaining a hawkish stance for now. The Fed's final rate hike should sink the USD again. 

We see the 25 bps hike forecast for the July meeting as the last for this cycle. Chair Powell won’t be in a position to confirm this at the press conference but is likely to emphasise the data dependent nature of policy. From here, another modest inflation print and further deceleration in employment growth before the September meeting should confirm 5.375% as the peak. 

We expect the FOMC to hike the FFR target range to 5.25-5.50% at the July meeting. A hike is almost fully priced by markets so investors will be on the lookout for signals of additional hikes at future meetings. June’s dot plot showed the FOMC expects more hikes to be necessary, which suggests remarks at the press conference may reiterate a bias toward hikes. Ultimately, we expect a rollover in growth and inflation data to mean this is the last rate increase in the Fed’s hiking cycle. June’s CPI report showed encouraging progress on disinflation, with headline inflation now down to 3%. We expect growth to slow in the second half of the year, and looser labor markets, weaker demand, and further progress on disinflation to prevent the Fed from hiking further.

The Federal Reserve is set to resume its policy tightening on 26 July. Inflation is moderating but remains well above target and with a tight jobs market and resilient activity, officials may feel they can't take any chances. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, we doubt it will carry through.

We expect the Fed to raise the target range for the FFR by 25 bps to 5.25-5.50%.  Despite recent declines, we expect a rebound in headline CPI inflation due to base effects in the coming months. In contrast, we expect a gradual decline in core inflation, but it is likely to remain elevated for the remainder of the year. Therefore, we stick to our view that the Fed is not going to pivot, i.e. cut rates, this year. We also think it is premature to declare a soft landing and we still see the US economy deteriorate in the second half of the year. Consequently, we continue to have our doubts about a second rate hike after July, as long as Powell clings to a more moderate pace of the hiking cycle.

The Fed will almost certainly hike 25 bps on Wednesday which we expect to be the final hike in the cycle. A September hike is priced at 33%, albeit up from 22% the previous week. With two CPIs and payrolls to come before then there is plenty of incoming data to confirm or dispute that assumption. The key for this meeting is if and how much the Fed messaging changes given recent softer inflation data. We suggest that there is little downside at this stage for the Fed to do anything other than maintain a hawkish bias even if they acknowledge the progress. 

We think the Fed will raise the FFR by 25 bps, to 5.25%-5.50%. Beyond the widely expected hike in rates this week, however, the path for interest rates is uncertain. Similar to prior statements, the Fed is likely to keep its options open. Our view remains that more weaknesses to domestic demand will emerge over the second half of 2023 as households are strained by elevated borrowing costs and slowing labour markets. That should in turn keep inflation low – and the Fed on the sidelines for the remainder of this year.

The Fed is widely expected to resume its tightening cycle on Wednesday after leaving rates unchanged in June for the first time since January 2022. A 25 bps increase – bringing the upper bound target to 5.5% – is effectively fully priced by OIS markets with nearly all forecasters, ourselves included, calling for such a move. While there won’t be any surprises when it comes to the headline decision, all eyes will be on the forward-looking segment of the press release which will give clues as to how much further, if at all, the Fed thinks it needs to raise rates. A Chair Powell press conference will also be highly informative on this front. Recall, the June ‘dot plot’ signaled two additional rate increases in 2023. Since then, encouraging inflation data has brought into question whether the second of these marginal hikes will be needed. 

We look for the Fed to lift the target range for the FFR to 5.25-5.50%. We believe this is the end, but the Fed should retain language from its June FOMC meeting keeping the open door to further moves if needed. 

The Fed is set to hike interest rates by 25 bps and signal the probability of a final hike thereafter.

A 25 bps hike at this week’s FOMC meeting is fully priced and widely expected. We do not expect any clear guidance on the timing of further rate hikes, but Chair Powell will likely continue to reference that ‘dots’ imply one more 25 bps increase.  Chair Powell may also restate the benefits of slowing down the pace of rate hikes but stop short of explicitly endorsing an every-other-meeting cadence.  

After the doves got their way in June, we expect the hawks to get theirs in July. We look for the FOMC to raise the fed funds target rate 25 bps to a range of 5.25%-5.50%. We have our own doubts about whether the FOMC will deliver another hike after its July meeting. The pause in June signals a significant number of officials are quite weary of the lagged effects of policy tightening undertaken already. At the same time, we expect to see the trend in core inflation to continue to ease over the next few months, which, when combined with more sluggish spending, investment and hiring will lead the Committee to settle in for an extended pause. However, we expect the post-meeting statement and Chair Powell in his press conference to signal that rate hikes beyond July remain possible in order to stave off any premature easing in financial conditions that could ultimately make it more difficult to tame inflation.