Outlook - Fed Rate Increase

It appears that Wall Street economists have a strong belief that the Federal Reserve will implement a 25 basis point increase to its benchmark interest rate on Wednesday. They view this as the last hike of this cycle. However, they do not anticipate Fed Chair Jerome Powell to publicly declare this just yet.

 

"While we anticipate that July will bring the Fed's last rate increase of this cycle, we do not think the Fed is comfortable signaling that shift," said Oscar Munoz, chief U.S. macro strategist for TD Securities in a note to clients. This sentiment was common in many research notes.

 

According to Gus Faucher, the chief economist of PNC Financial Services Group, it is expected that job growth and inflation will slow down by the time the Fed meets again in late September. As a result, Faucher believes that the Federal Reserve will adopt a cautious approach and wait to see how the situation unfolds before making any decisions on further rate hikes. The economic slowdown is anticipated to persist, leading to a pause in rate increases by the Fed.

 

An additional increase of a quarter percentage point will bring the federal funds rate to a range of 5.25%-5.5%. In the previous month, the Fed decided to pause their rate hikes after ten consecutive meetings and maintained their policy rate. However, officials have projected two more quarter-point increases before the year concludes.

 

"Even though the majority of Fed members are calling for a couple more moves, we think the economy will continue to decelerate," said Sal Guatieri, senior economist at BMO Capital Markets. The slowdown will lead to a "permanent pause" for the rest of the year, he added, in an interview.

 

According to Avery Shenfeld, chief economist of CIBC Capital Markets, economists were highly impressed with the consumer inflation report for June. Consumer inflation plunged to 3.1% annual rate in June from a high of 8.9% in the same month last year. In an interview, Shenfeld stated that "the market is beginning to have confidence in the natural dissipation of inflation." However, he is of the opinion that the Federal Reserve has likely not completed its actions. "They could well hike again in September if they don't see easing in labor-market tensions," Shenfeld said.

 

The robust labor market has been a notable revelation for economists in the current year. Throughout the entire year, the nation's unemployment rate has remained at 3.7% or below, resulting in a substantial addition of 278,000 jobs per month during the first half of the year.

 

Based on the Federal Reserve's projections, policymakers believed that in order to curb inflation, the unemployment rate would need to surpass 4.5%.

 

The positive inflation news this month and the ongoing robust job growth is raising expectations for a potential combination of low inflation and a strong labor market in the United States. However, experts believe that the Federal Reserve may not share the same outlook. According to Shenfeld, they are unlikely to believe that it is possible to maintain a 3.5% unemployment rate alongside a 2% inflation rate.