FOMC Meeting Preview: Powell Faces Crucial Decision As Inflation Data Puts Fed At A Crossroads

At the upcoming Federal Open Market Committee (FOMC) meeting on Wednesday, the Federal Reserve is poised to increase the fed funds rate by 25 basis points, pushing borrowing costs to 5.25-5.5%, the highest since February 2001.

While the market shows strong conviction in this rate hike, economists still hold differing views on whether this will mark the end of the current rate-hiking cycle.

After it dropped to 3% year-on-year in June, the lowest level since March 2021, inflation remains a pivotal factor in shaping the Fed’s next decisions. Investors are eagerly awaiting the Federal Reserve’s perspective on inflation in the coming months, as they seek insights into the likelihood and pace of a return to the 2% target.

Also Read: Will Jerome Powell Be Hawkish Or Dovish? How These 5 ETFs Could React To The Fed’s Rate Decision Wednesday

Chart: Fed Funds Rate Are Expected To Reach Levels Last Seen In February 2001

To gain a comprehensive understanding of the current sentiment, let’s explore the insights of five analysts.

John Lynch, Chief Investment Officer, Comerica Wealth Management

John Lynch predicts that the Federal Reserve will raise interest rates by 25 basis points at its next meeting. The uncertainty stems from whether this is the final hike of the current cycle, as well as the duration of elevated interest rates.

Fed Chair Jerome Powell’s recent hawkish remarks signal that the Fed may raise interest rates twice more this year to combat inflation. Nonetheless, softer-than-expected inflation readings since the last meeting have fueled speculation that, depending on incoming data, the Fed may terminate its tightening cycle after the next raise.

Due to the uncertainty around the delayed effects of rate hikes, the analyst expects the Fed to adopt “a wait-and-see approach” on future rate increases.

Michael Gapen, U.S. Economist At Bank of America

Bank of America’s U.S. economist, Michael Gapen, forecasts a 25 basis point increase, raising the target range to 5.25% – 5.50%. The Fed is likely to retain its current rate guidance in the statement, and Gapen feels the Fed is not yet ready to indicate the end of its tightening efforts.

The market will focus on four major communication cues during Powell’s press conference: reaffirmation of the 2% inflation target, seeking lower inflation without damaging the economy, signaling the possibility of further tightening, and highlighting data dependency.

The Fed aims to sustain disinflation by methodically tempering the economy through a balance of supply and demand, the analyst says.

Oliver Rust, Head Of Product At Truflation

Rather than the rate-decision announcement – 25bp is fully discounted – Federal Reserve Chair Jerome Powell’s speech, according to Oliver Rust, will define the market’s reaction to the FOMC meeting.

Powell’s hawkish posture may lead him to push for another rate hike in September, depending on other FOMC members’ agreement. Despite recent reductions in CPI, Powell is primarily concerned about inflation, as strong employment and supply-side demand continue to impose inflationary pressures.

However, the expert highlights concerns for smaller businesses that are unable to absorb rate increases, which might have an impact on the U.S. economy and potentially lead to a recession.

Lawrence Gillum, Chief Fixed Income Strategist, And Adam Turnquist, Chief Technical Strategist, LPL Financial

According to Lawrence Gillum and Adam Turnquist, the performance of fixed-income assets this year has been influenced by inflation and the Federal Reserve’s policies. Although there were high hopes for a bond rally in 2023, the lingering impact of inflation and the Fed’s ongoing rate increases have moderated these expectations.

The two analysts foresee that the Fed will likely raise rates again at its current meeting, with another increase possible later in the year. A delay in the Fed’s rate hikes has traditionally benefited fixed income markets, implying that a favorable outlook for fixed income may be postponed rather than canceled.

Now Read: Top Wall Street Strategist Warns Of Possible Market Bubble, Points To Tech Concentration In S&P 500 And AI Hype

Photo: Federal Reserve