A Fed Rate Hike Is All But Certain This Week: 2 Phrases In The FOMC Statement May Be What Moves The Market

The Federal Open Market Committee (FOMC) is widely expected to issue at least one more 0.25% interest rate hike at the conclusion of its meeting on Wednesday. The rate hike itself will likely not move financial markets much, but the language the FOMC uses in its policy statement could be a major catalyst.

The bond market is pricing in an 88.9% chance of a rate hike this week, suggesting the hike itself is already priced into the market. The big question at this point for investors is what the Fed will do in June.

Assuming the Fed raises rates by 0.25% this week, the market is pricing in a 34.6% chance of another rate hike in June and a 6.8% chance of a rate cut in June.

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What To Watch: Bank of America economist Michael Gapen recently said the language of the FOMC statement will be a strong indicator of what the Fed plans to do in June. In particular, Gapen said the FOMC will change or eliminate the phrases "some additional policy firming" and "the extent of future increases in the target range" if it intends to pause rate hikes in June.

"The challenge will be to credibly signal an extended hold and push back against market pricing of rate cuts (roughly 60bp in 2023 and 150bp in 2024 at the time of this writing), particularly given the latest bout of banking sector stress," Gapen said.

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Bank of America anticipates the Fed will pause its rate hikes in June, but it may take longer than many investors realize before it pivots to rate cuts.

Greg McBride, chief financial analyst at Bankrate, said Monday the fed funds rate only recently surpassed the consumer price index inflation rate.

"The continued strength of the labor market and slower-than-hoped moderation in inflation pressures underscore the case for the Fed raising interest rates again on May 3. The Fed has sown a credibility issue on inflation and the way to dispel that is to see the job of restoring price stability through," McBride said.

The Case For A June Rate Hike: Gina Bolvin, president of Bolvin Wealth Management Group, said last week's core personal consumption expenditures price index reading, which was up 4.6% in March, suggests another rate hike in June may still be on the table.

"If [Jerome] Powell pounds the table on “more work to do” the market could very well pull back. More rate increases and higher for longer is a headwind for growth-oriented stocks and interest rate sensitive assets like technology and bonds," Bolvin said.

Bill Adams, chief economist for Comerica Bank, said it will likely take a U.S. recession for the Fed to pivot to rate cuts in 2023.

"They will likely talk down the possibility of rate cuts this year, while admitting that they are data dependent. A couple of months of data showing the economy was clearly in recession would probably be enough for the Fed to begin lowering rates from the May level before the end of 2023," Adams said.

Benzinga's Take: The base-case scenario is a 0.25% rate hike this week and a likely shift in the language of the FOMC statement setting the groundwork for a potential pause in rate hikes in June. If the FOMC statement or Fed Chair Powell even hint that another rate hike is likely in June, it could be a rough week for the SPDR S&P 500 ETF Trust SPY.

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