Awaiting Clarity: Stock Market May Face Months of Waiting for Fed’s Rate Path

Today, in Washington, the Federal Reserve is set to enact its eleventh rate hike within a year. However, the market may need to exercise patience for several weeks, perhaps even longer, to understand the central bank’s longer-term policy goals comprehensively.

According to the real-time monitoring of interest rate bets through the CME Group’s FedWatch tool, there is a staggering 98.9% probability that the central bank will raise its benchmark Fed Funds rate by a quarter point, bringing it within a range of 5.255% to 5.5%. This marks the highest level seen in over two decades.

Looking ahead beyond this imminent hike, the market indicates a mere 37% likelihood that Federal Reserve Chairman Jerome Powell and his colleagues will opt for another increase before the year concludes. This sentiment aligns with the insights shared in the Fed’s recent ‘Summary of Economic Projections,’ commonly called ‘dot plots,’ and the minutes from its last policy meeting held in June.

Members of the Open Markets Committee, led by Powell, have expressed a desire for two or more rate hikes, citing robust growth, a tight labor market, and higher-than-expected inflation in the last quarter. Powell emphasized that while policy rates are restrictive, they may not be restrictive enough.

Highlighting the labor market’s strength with job creation and steady wage gains, Powell outlined the resulting boost in real incomes and subsequent spending, which drives up demand. Although the decision for June’s rate hike was confirmed, Powell did not rule out the possibility of consecutive rate adjustments in the future.

However, June witnessed the weakest job growth in three years, and wage growth remained stagnant, fluctuating between 0.3% and 0.4% over the past nine months.

Various factors, such as the slowdown in inflation, which dipped to 3% last month, and indications of a weakening economy, could prompt the Fed to ease the rate hikes. Nonetheless, the upcoming data points scheduled before the central bank’s meeting in September and Powell’s keynote speech at the Jackson Hole symposium in August may play a pivotal role in shaping or confirming the Fed’s policy direction.