Today in Washington, the Federal Reserve is set to deliver its eleventh rate hike in just over a year. However, markets may have to wait several weeks, or possibly longer, to understand the central bank’s longer-term policy intentions clearly.
The CME Group’s FedWatch tool, which tracks interest rate bets in real-time, indicates a 98.9% likelihood that the central bank will raise its benchmark Fed Funds rate by a quarter point, bringing it to a range between 5.255% and 5.5% – the highest level in over two decades.
Beyond this hike, the markets suggest only a 37% chance that Federal Reserve Chairman Jerome Powell and his colleagues will proceed with another increase before the year’s end. This sentiment aligns with the Fed’s recent ‘Summary of Economic Projections,’ or ‘dot plots,’ and the minutes from its last policy meeting in June.
Powell’s colleagues in the Open Markets Committee have expressed a desire for two or more rate hikes due to robust growth, a tight labor market, and higher-than-expected inflation in the last quarter. Though restrictive, Powell stated that policy rates might not be restrictive enough.
He pointed out a strong labor market with job creation and solid wage gains, driving real incomes and subsequent spending and increasing demand. While the decision for June was made, Powell did not rule out consecutive rate moves in the future.
However, June’s job growth was the weakest in three years, and wage growth has been stagnant between 0.3% and 0.4% for the past nine months.
Factors such as slowing inflation dipping to 3% last month and a weakening economy could prompt the Fed to ease off on rate hikes. Nevertheless, data points to be released before the central bank’s meeting in September and Powell’s keynote speech at the Jackson Hole symposium in August could influence or confirm the Fed’s policy direction.
