Is the Federal Reserve in its final stage of raising rates? That’s the big question about Wednesday’s Fed meeting.
The overwhelming odds, according to the futures market, are for a 0.75 percentage point increase at the November meeting, followed by a 0.50 to 0.75 point increase in December. This would bring the benchmark federal funds rate to a maximum range of 4.50% to 4.75%, from 3.0% to 3.25% currently.
If so, that’s a bit higher than the current level. But considering the rate was close to zero at the start of this year, market forecasts suggest the pain is over and the worst is over.
Notice what is not part of this prognosis: a pivot to lower rates. Of course, a recession in 2023 could well change the thinking of the Fed, which is now focused on reducing the stubbornly high rate of inflation. On the other hand, the Fed could choose to overshoot what futures are saying and tighten even further in the face of a resilient price escalation.
Nevertheless, the bet at the moment is that the increases will be completed in the near future. As a research report by LPL Financial indicates, as Fed Chairman Jerome Powell “has repeatedly emphasized, the Fed will ‘continue,'” he also noted in late September, the Fed the time to slow down would soon be approaching.” LPL points out that some Fed officials have indicated “now is the time for the Fed to scale back rate hikes as the economy reacts to past rate hikes.”
Of course, investors are hoping the Fed will end its hikes, even if another rate cut doesn’t follow soon. “The market wants to believe the Fed is going to hit 5% and stay there for a while,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, told CNBC. “People are tired of being bludgeoned, and I think they want to believe the bludgeoning is over.”
Continued increases are one thing, and rate cuts are another. For Ken Mahoney, CEO of Mahoney Asset Management, any Fed pivot is a long way off. The reason is that Fed officials “are tough on their hawkish tone and we expect that to continue.” Yet, he adds, the end of the reminders could be near. “It would be hard to say they’re only in rounds two or three of the rate hikes, and we think it’s more like rounds six or seven.”
There are signs that economic growth may start to slow so that inflation may be capped, which could further dampen Fed hawkishness. The housing market, for example, began to falter.
Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, argues that the Fed gets what it wants. “We have peaked in inflation as pricing power is challenged and supply chains heal,” she says.
And if the Fed continues to raise rates, it will run into political problems, in Booth’s view: “The changing political winds pose the greatest challenge to the Fed and its independence. There are growing calls for the Fed to suspend rate hikes due to the idea that job losses are worse than inflation for most households.