Fed Meeting Preview: Powell Prepares to Deliver a Hawkish Pause Next Week

Source: Investing.com

Financial markets are currently pricing in a 98% chance of the Fed holding interest rates at current levels, according to Investing.com’s .

If the Fed does, in fact, skip further tightening next week, it will leave the benchmark Fed funds target range in a range between 5.25% and 5.50%, which is the highest level since January 2001.

Source: Investing.com

Beyond the expected rate decision, all eyes will be on Fed Chair Jerome Powell, who will speak shortly after the release of the FOMC , as investors look for fresh clues on how he views inflation trends and the economy.

Policymakers will also release new forecasts for interest rates and economic growth, known as the ‘dot-plot,’ as investors grow increasingly uncertain over the Fed’s monetary policy plans through the end of the year and beyond.

Prediction: Hawkish Pause

While I expect the Fed to remain on hold next week, the accompanying policy statement will make sure to let everyone know that November could very well bring about another rate hike.

In addition, Powell will likely signal that further tightening will be necessary while stressing that the decision will remain data-dependent and that the U.S. central bank remains strongly committed to bringing inflation back down to its 2% goal.

As such, I would not be surprised to see most officials continue to project at least one more rate hike by year-end in their updated ‘dot plot’ projections.

That being the case, there is a growing risk that the Fed could raise rates to levels above where markets currently anticipate and keep them there for longer as there is still more work for them to do to slow the economy and cool inflation.

Indeed, U.S. consumer price data released this week showed increased by 0.6% last month, the largest gain since June 2022, amid surging energy prices. In the 12 months through August, the rose 3.7%, picking up from 3.2% in July.

Source: Investing.com

Excluding the volatile food and energy items, the measure edged up 0.3%, moderated by a decline in prices for used cars and trucks. Annually, slowed from 4.7% to 4.3%, the smallest year-on-year gain since September 2021.

Considering the recent spike in and gas prices, inflationary pressures will likely reaccelerate further in the months ahead, resulting in another wave of hot inflation.

Moreover, the economy continues to hold up much better than expected in the face of higher rates. Despite widespread expectations of a potential U.S. recession this year, the economy has proven considerably more resilient than anticipated by many on Wall Street amid a solid labor market and robust consumer spending.

Taking that into account, I remain hesitant to bet on an end to Fed tightening just yet. Indeed, futures tied to the Fed’s funds rate now show a roughly 40% chance of another rate hike by December, up from a 30% chance seen a month ago.

Source: Investing.com

At the same time, markets have pushed back the timing of the first rate cut next year to July 2024, compared with expectations a month ago that rates would begin falling by March, as inflation remains well above historical standards.

What To Do Now

Investors may want to exercise caution in the near term as the current environment is far from ideal to be adding to your exposure to equities. So long as inflation continues to be sticky and the Fed leaves the door open to another rate hike, I believe the stock market will struggle to make headway for the rest of 2023, and equities will face more .

At the time of writing, I am short on the , , and via the ProShares Short S&P500 (NYSE:), ProShares Short QQQ (NYSE:), and ProShares Short Russell2000 (NYSE:).

Additionally, I am long on the via the Dow Jones Industrial Average ETF (NYSE:). I also have a long position on the Energy Select Sector SPDR ETF (NYSE:) and the Health Care Select Sector SPDR ETF (NYSE:).