Wall Street Expects Another 0.75% Interest Rate Hike This Week, But Timing Of Fed Pivot Is Key

The SPDR S&P 500 ETF Trust SPY gave up some of its October gains on Monday morning ahead of a critical Federal Open Market Committee interest rate decision on Wednesday.

The bond market is pricing in an 88.7% chance of a fourth consecutive 0.75% rate hike this week, according to CME Group.

Just a month ago, the market was pricing in just a 56.5% chance of another 0.75% rate hike.

Related Link: Why The Fed Needs To 'Break The Labor Market' To Avoid A 'Wage-Price Spiral'

The Federal Reserve is unlikely to surprise with just a 0.5% cut this week given the consumer price index (CPI) gained 8.2% in September, exceeding economist estimates of 8.1%.

In addition, U.S. GDP grew 2.6% in the third quarter, ahead of the 2.3% growth economists were expecting.

Many investors are likely looking beyond Wednesday's rate hike to determine when the Fed will slow the pace of its tightening and eventually pivot to cutting rates.

Related Link: Goldman Sachs Raises Peak Fed Rate Estimate To 5% With Hikes Extending Beyond February: Report

Goldman Sachs Predictions

• The Fed's target rate range will peak at between 4.75% and 5% in March 2023
• That's up from its current range of between 3% and 3.25%.
• The Fed will opt for a 0.75% rate cut this week, another 0.5% rate cut in December and a 0.25% rate cut in February.
• In September, Goldman said it doesn't expect the next rate cut until 2024.

As of Monday, Oct. 31, investors appear to be on the fence about when and where interest rates will peak. The bond market is pricing in a 48.8% chance the Fed's target range will reach 5.0% to 5.25% or higher by May 2023.

Looking out to December 2023, the market is pricing in a 28.3% chance the Fed's target range will be 4.5% to 4.75%.

It's also pricing in a 34.5% chance the target range will be higher than 4.5% to 4.75% by the end of 2023 and a 37.3% chance it will be lower.

Powell's Commentary

In addition to the interest rate decision, investors will be listening closely to Fed Chair Jerome Powell's commentary on the economic outlook at his press conference starting at 2:30 p.m. EST on Wednesday.

DataTrek Research co-founder Nicholas Colas says Powell is unlikely to use incrementally hawkish language on Wednesday given market expectations are currently aligned well with the Fed's latest "dot plot" economic projections.

"They will, however, want to keep market expectations in line with their own views on future rate policy," Colas said. "We should therefore not expect to hear any dovish commentary either."

The GDP reading suggests the Fed needs to continue prioritizing inflation over economic growth, even if it opts to slow its pace of tightening, according to Quincy Krosby, chief equity strategist for LPL Financial.

"A 'slowdown' isn’t a pause, and the chairman should remember his comments about the 'pause' in policy during the 1970s, and how it led to inflation enveloping the economy," Krosby said.

Benzinga's Take: The market seems convinced a 0.75% rate hike is coming this week, but any surprises in the interest rate decision or Powell's commentary could trigger some major volatility on an already jittery Wall Street. Likewise, any commentary Powell makes suggesting the Fed could dial back its rate hikes to 0.5% or lower in December would likely be received well by the market.