June Fed Meeting: How Markets Could React To Rate Decision, Powell's Comments Wednesday

The long-awaited Federal Reserve meeting has finally arrived. The Federal Open Market Committee (FOMC) will announce its interest rate decision and unveil its macroeconomic projections for interest rates, growth, employment and the labor market on Wednesday, June 14.

After increasing rates by 500 basis points over the course of the past 15 months, it is widely expected that the Fed will hold interest rates steady at the 5%-5.25% range. The market is pricing in a near-certainty to that scenario, according to the latest CME Group FedWatch Tool.

Rather than the policy decision itself, most attention will be paid to Fed Chair Jerome Powell’s indications about future policy adjustments, as well as the Fed members’ median predictions for interest rates in 2023 and 2024.

The difference between a “dovish hold,” in which Powell acknowledges that rates have reached a suitably high level, and a “hawkish hold,” in which a halt in June does not prevent further raises, will be crucial in terms of market reactions tomorrow.

Fed’s Dot Plot Set to Trigger Strong Reactions

Investors eagerly await the updated Fed’s macroeconomic projections and will also place a significant emphasis on Powell’s press conference, which has the potential to significantly impact market dynamics and sentiment going forward.

March’s Fed economic projections highlighted a peak interest rate of 5.1% by the end of 2023, essentially where we are now, with a projected drop to 4.3% by the end of 2024. Real GDP growth for 2023 was set at 0.4%, while core PCE inflation was expected at 3.6% in 2023 and 2.6% in 2024.

Revisions of the Fed’s median interest rate projections for this year and the next could surprise markets. Presently, investors price in interest rates of 3.75%-4% by December 2024, implying five 25-basis point cuts from the current level.

A median rate greater than 5.3% in 2023 would signal that Fed members are likely to hike interest rates twice this year, sending shockwaves through the market and causing severe volatility.

In this scenario, the dollar will gain, while rate-sensitive assets such as stocks, bonds and gold will likely suffer on a broader selloff.

All Eyes On Powell’s Remarks

Powell’s press remarks will be also closely scrutinized, with investors concentrating on comments concerning recent regional bank stress and consequent credit tightening, as well as on the economic conditions for triggering another rate hike.

In May’s FOMC policy statement, the Fed highlighted that tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. It will be critical to assess how those expectations have evolved since May, after witnessing stronger-than-expected hiring, the resolution of the debt-ceiling crisis and the stabilization of the regional banking sector.

June FOMC Meeting: Latest Analysts’ Views

According to ING Group, the Fed will leave the door open to further rate moves, expressing that “future increases may be appropriate.” In their base case, they anticipate the Fed to describe inflation as unacceptably high, with moderating upside risks, and emphasize the need for a period of below-trend growth. The dollar is expected to gain, leading to the EUR/USD pair falling to 1.07.
JP Morgan Chase & Co. suggests that the Fed would be well advised to pause at this point, but Powell may emphasize that skipping a rate hike now does not mean the Fed is done raising rates. However, the largest U.S. bank expects rate cuts within the next year, improving the investment landscape across various assets.
Bank of America expects the median interest rate projection for 2023 to shift higher by 25 basis points, but sees the projection of cuts next year as more vulnerable. The June FOMC statement is likely to reveal that the pause in June is more akin to a temporary skip, with the committee maintaining an upward bias to its policy rate path. Any immediate dollar softness on a “dovish” interpretation is expected to be short-lived.

How Are Markets Approaching The June Fed Meeting

The SPDR S&P 500 ETF Trust SPY, which closely tracks the S&P 500 Index, has reached its highest level since end-April 2021, more than 13 months ago, after increasing 14% year to date.
After climbing 35% year to date, the Invesco QQQ Trust QQQ, which tracks the tech-heavy Nasdaq 100 index, is also not far off its April 2022 highs.
Two-year Treasury yields, a proxy for interest rate expectations, have lately surged above 4.7%, gaining more than 70 basis points in the last month.
The Invesco DB USD Bullish Index Fund ETF UUP, which tracks the US dollar index, has been rather stable in the last month.

Chart: U.S. Stock Market Hits 13-Month Highs as June FOMC Meeting Approaches