The Federal Reserve is widely expected to deliver a fourth consecutive rate increase of 0.75% Wednesday afternoon. But what happens after the next Fed rate hike? Market participants desperately want – no matter how unlikely – for the central bank to show any signs of taking a more dovish stance going forward.
After all, markets have been in rally mode since mid-October on the slimmest reeds of hope that the Fed could ease back on its aggressive policy of outsized rate increases.
Although Chair Jerome Powell has been explicit about the central bank’s commitment to crushing rampant inflation, a Fed pivot isn’t entirely out of the question. The initial reading on third-quarter gross domestic product, while delivering a strong headline number, did indeed include troubling underlying details. Furthermore, the latest data on the Fed’s preferred inflation gauge came in ever-so-slightly below forecasts.
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Be that as it may, experts say another 75 basis point (a basis point equals 0.01%) rate hike is all but in the books when the Fed concludes its regularly scheduled two-day meeting on Wednesday. And so all eyes are on what Powell has to say at the post-decision press conference.
With the policy announcement on tap, we decided to check in with economists, strategists, investment officers and other market pros to see what they have to say about the Fed’s latest confab. Please see a selection of expert commentary, sometimes edited for brevity, below:
“It’s clear the Fed is going 75 basis points [0.75%], and all that matters is the tone in the press statement and Powell’s body language at the presser.” – David Rosenberg, founder and president of Rosenberg Research”U.S. equity futures are in rally mode while the dollar fell ahead of Wednesday’s Fed announcement. Although a 75-bp rate hike is all but locked in for tomorrow, markets will be looking for clues on whether the aggressive moves could be nearing an end.” – Priscilla Thiagamoorthy, economist at BMO Capital Markets “Since this week’s deliberation will not include updated economic projections or a dot plot, the approach the chairman takes in his post-meeting press briefing will set the tone for the financial markets for the next several weeks now that markets have rallied in the hopes a pivot will be announced. Given the data on inflation and lack of any break in the tight labor market, we believe the chairman will emphasize the risks of pausing too soon over the risks of overtightening as the main driver of policy. If we are correct, there will need to be sharp correction in the markets and we hope the committee has finally learned that presenting a unified front requires more than a unanimous vote at the conclusion of their deliberations.” – Steven Ricchiuto, U.S. chief economist, at Mizuho Securities USA”Following a large decline in August, job openings increased by 437,000 in September, defying expectations of a cooling job market. While today’s increase doesn’t offset last month’s 890,000 decline, it is an indication that the job market is still very tight, and that’s bad news for the Federal Reserve and for inflation. Therefore, we continue to believe that the Fed will raise rates by 75 basis points at Wednesday’s FOMC meeting.” – Giampiero Fuentes, economist at Raymond James”A 75-basis point rate hike on Wednesday should be fully expected, as the unemployment rate is still at a 50-year low and there is nothing to suggest that Powell will soften his stance on fighting inflation. The stock market surge since the last Fed meeting in mid-September only strengthens Powell’s case for continuing to tighten financial conditions. The idea that the Fed would initiate a smaller 50-basis point rate hike in December has been telegraphed for some time and I would not interpret this as a signal that there will be rate cuts any time soon, which is a message that Powell is likely to deliver on Wednesday.” – Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence”While there are some encouraging signs that inflation is slowing, the Fed will likely still raise the federal funds rate a big three quarters of a percent at their decision Wednesday. The Fed was surprised by how long and how much inflation surged in late 2021 and 2022. They want to make sure that their next mistake does not come from underestimating inflation’s intensity or persistence.” – Bill Adams, chief economist for Comerica Bank”Although market participants anxiously await the end of the Fed’s rate hike cycle, they do not want the Fed to pause long enough to allow inflation to continue to build and leave an economic underpinning of stagflation. Chairman Powell has repeatedly made the point that the stop and start Fed policy in the 1970s, led by Arthur Burns, was a mistake as it allowed stagflation to build and made tackling it much more difficult. He has repeatedly alluded to the success brought by Paul Volcker, the Fed Chairman who brought inflation down dramatically and forcefully. Still, some Fed members are becoming increasingly vocal as they seek to begin the discussion about stepping back despite high inflation. As a recent Bloomberg headline so aptly implied: Is Powell going to maintain his inner Volcker or emerge as a latter day Arthur Burns? We may have the answer, or at least some clues, in the coming meetings.” – Lawrence Gillum, fixed income strategist; and Quincy Krosby, chief global strategist, at LPL Financial”Markets are rallying on hopes policy tightening is nearing an end – prematurely, in our view. We think the Fed, like other developed market (DM) central banks, will only stop when the severe damage from rate hikes is clearer. Rates have already hit levels that may trigger recessions, in our view. Plus, shrinking central bank balance sheets put selling pressure on long-term government bonds and risk causing market mayhem. That keeps us underweight stocks and government bonds.” – Scott Thiel, chief fixed income strategist at BlackRock Investment Institute”Although some chatter in the markets has predicted over the last week a more dovish stance in December, there has been only a very minor change in Fed Fund futures for 75 bps in November and 50 bps in December. Year-end 2023 expectations, however, have become a bit more dovish. Comments by Powell and other Fed officials after the FOMC meeting will, however, be the true determining factor for the 2023 policy outlook coupled, of course, with macro-economic and financial market developments. Powell and others will likely push back against anything more than considering only 50 bps in December. They are working hard to ensure that inflationary psychology is routed.” – John Vail, chief global strategist at Nikko Asset Management”The Federal Reserve will likely continue hiking interest rates to slow aggregate demand and attempt to bring demand and supply back into balance. Rising unemployment should fix some of the imbalances between the number of individuals looking for work and firms with open positions.” – Jeffrey Roach, chief economist at LPL Financial