After strong recent economic data, markets are implying that an easing of monetary policy is only likely around June or July 2024. (ddp)

After 525 basis points added to US rates since March 2022, the fastest tightening cycle since the 1980s, policymakers have been signaling that an end to hikes is near. With monetary policy already restrictive and the lagged effects of prior increases still feeding through into the economy, the Fed has indicated that further rate rises would need to be justified by incoming data showing inflation and the labor market are cooling slower than expected—so-called data-dependency.


Our base case is that the Fed has already finished hiking rates. But recent data on inflation and jobs have been mixed, keeping alive the potential for further tightening. In our view, investors will be looking at three main aspects of the meeting:


Even if the Fed doesn’t raise rates today, it is unlikely to rule out a final hike this year. Having raised rates in July, top Fed officials have been indicating that a hike at today’s September meeting is unlikely. As a result, investors are pricing just a 1% probability of a tightening, based on CME Group data. However, markets still see a roughly 30% chance of an increase at the November meeting, which would represent the twelfth hike of the cycle.


The potential for further action may have been increased by the recent rebound in energy prices, with Brent crude rising to close to USD 96 a barrel earlier in the week before retreating today. While the Fed focuses more on underlying inflation, higher energy costs do feed through into other prices and can raise the risk that expectations for continued elevated inflation will become entrenched among consumers.


Investors will be eager for guidance on when the Fed could start cutting rates. The main signals on this question will come from the dot plot, which charts the expectations of monetary policymakers, and from Chair Jerome Powell’s press conference following the meeting. The prior dot plot, published in June, pointed to two further rate hikes before the end of 2023—one of which the Fed delivered at its July meeting. Investors will be looking for any change in this projection—notably how the hiking cycle could turn into a cutting cycle.


After strong recent economic data, markets are implying that an easing of monetary policy is only likely around June or July 2024. The dot plot could also point to rates staying higher for longer, versus a median forecast for 100 basis points of cuts in 2024.


The Fed is likely to reaffirm confidence that the US will avoid a downturn through its economic forecasts. The main insight from the previous Summary of Economic Projections (SEP) was that the Fed no longer expected a recession, with GDP growth of 1% this year and 1.3% in 2024. Investors are expecting the forecasts to show that the Fed has become even more upbeat on the outlook for growth. An additional focus of attention will be how quickly the Fed expects inflation to approach its 2% target, based on the personal consumption expenditure index (PCE). In June, the Fed had projected an average PCE inflation of 3.2% this year, falling to 2.5% next, and 2.1% in 2025.


So, there is likely to be plenty for investors to focus on in the Fed’s meeting. Our base case remains that the Fed has already finished hiking. But with inflation still above target and the jobs market cooling only gradually, the risk of further tightening looks likely to linger. That should contribute to choppy and rangebound trading in equity markets, supporting our preference for equity laggards—including the equal-weighted S&P 500, which has trailed the main index, along with emerging market stocks.


Main contributors - Solita Marcelli, Mark Haefele, Brian Rose, Christopher Swann, Vincent Heaney, Jon Gordon


Original report - Markets brace for the Fed meeting, 20 September 2023.