Economists Speak In Chorus: Fed's 15-Month Hiking Cycle Set to End in June; Markets At Risk If The Call Is Incorrect

The majority of economists polled by Bloomberg predict the Federal Reserve will end its 15-month streak of interest rate increases in June and leave rates unchanged at 5%-5.25% until December 2023.

This prediction is consistent with current market sentiment, as investors are pricing in an 80% chance that the Fed will keep interest rates unchanged on June 14, according to the latest CME Group FedWatch Tool.

There are clear disagreements among economists, market participants and Fed board members about the July FOMC meeting. About one-third of surveyed economists foresee a rate hike in July, while the market is assigning a 65% probability to a rate increase by that time.

Some hawkish members of the Fed who favor higher rates, such as Cleveland’s Loretta Mester and St. Louis’ James Bullard, have even mentioned the possibility of skipping a meeting and tightening policy during the summer.

A Hawkish Hold With A Split Board? The Federal Reserve has taken on a more dovish tone than expected in recent weeks, effectively guiding for a pause in June.

Last month, Chair Jerome Powell indicated that it would be wise to evaluate the lag time between policy changes and their effects on the economy and the availability of credit in light of recent bank failures.

Some Fed watchers expect the Fed will pause in June and deliver a hawkish message, emphasizing the pause does not rule out future tightening.

Moreover, nearly 40% of economists polled by Bloomberg anticipate a dissenting vote at the meeting, which will mark a break from the unanimous decisions seen throughout Powell’s tenure. Gov. Christopher Waller, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari are all hawks who support higher interest rates and are therefore likely to vote against a pause.

Market Tilted to One Side: Surprise Rate Hike Could Result in Heavy Pain and High Volatility: The markets have widely priced in a potential pause by the Federal Reserve in June, resulting in a notable rally in risky assets in recent weeks.

While there has also been a concurrent AI-driven rally, the significant 9% increase witnessed in the Consumer Discretionary Select Sector SPDR Fund XLY over the past month, aligning with similar gains seen in the Invesco QQQ Trust Series 1 QQQ, can largely be attributed to expectations of a pause in interest rate hikes.

Market volatility as measured by the VIX index (also known as the “fear index”) is at its lowest level since February 2020, before the start of the COVID-19 pandemic, and has fallen nearly 20% in the past month alone.

Stocks of regional banks, tracked by the SPDR S&P Regional Banking ETF KRE, which have lagged behind all other sectors so far this year, have rallied 16% in the last month on hopes of an industry recovery and less tight credit conditions.

Given the current market situation, a sudden surprise rate cut by the Federal Reserve could cause widespread damage among risky assets. It is important to note that there is still a CPI (Consumer Price Index) release scheduled for Tuesday before the two-day FOMC meeting, which adds another layer of uncertainty.

Chart: Fed’s Rate Pause Bets Spark Rally in Discretionary, Tech, and Regional Banks

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