This Wednesday, the Federal Reserve is expected to announce a 25 basis point interest rate hike – the second consecutive meeting of slower rate hikes. Markets are pricing in nearly 100% chance that the Fed will raise its benchmark interest rate by 25 basis points, bringing it to a range of 4.5%-4.75%. But investors should also be looking for clues as to how much more the benchmark rates could rise and when they may pause altogether. Let’s dive in.
Fed Signals More Rate Hikes Ahead
The chorus of Fed officials have signaled that this quarter-point increase is appropriate and necessary going forward due to inflation data showing signs of easing while remaining well above their 2% target goal. The current talk around Wall Street circles is that the central bank will likely keep hiking rates through 2023, but at a slower pace than before. There could even potentially be one last hawkish sting in tail with language committing elevated levels for some time.
Expectations vs Reality?
But what if the actual outcome on Wednesday ends up being different from what markets have priced in? If there are any unexpected surprises during the meeting or statement, investors should be prepared for a potential reaction from markets — both positive and negative. Even though a 25-basis-point hike has already been priced into the market, any additional comments from Fed members regarding future plans or expectations can cause a shift in investor sentiment and subsequent market moves.
Impact on Investors & Economy
For investors, higher borrowing costs mean less liquidity for consumers and businesses alike — which can further constrain economic growth. Higher borrowing costs also mean higher mortgage payments, making it increasingly difficult for Americans to purchase homes without taking on hefty debt burdens; this could lead to further contraction in housing prices across the US. Furthermore, it could cause an outflow of capital back into government bonds as investors seek out safer investments amidst rising uncertainty over global trade policy and an increasingly volatile stock market environment.
Conclusion: All eyes will be on Wednesday’s announcement from the Federal Reserve regarding its latest interest rate hike decision – but investors should also be looking out for any signals beyond just raising rates by 25 basis points as this could affect market sentiment going forward either positively or negatively depending on what is said or not said during the meeting or subsequent statement release afterwards. Keep your eyes open! For now, it looks like we can expect at least one more interest rate hike before 2023 ends – but beyond that remains unclear until Wednesday’s announcement offers us some clarity on where things stand currently with respect to future monetary policy decisions from America’s central bank. Stay tuned!