It’s still a month to go before the next Fed meeting.
But it’s hard to find a week where the Fed won’t steal the spotlight. Later today, the markets will get a more detailed view of what was discussed at the Federal Reserve’s July 26-27 meeting, when the FOMC raised its policy rate by 75 basis points for a second-straight meeting, as it struggles to bring inflation under control.
Tame inflation data last week shifted expectations for September’s hike to 50 basis points from 75. But mixed data this week on housing and industrial production has pushed the odds back to around 50-50 while the Treasury yield curve (US10Y) (US2Y) continues to flatten.
Last month, Fed Chairman Jerome Powell provided some more details at his post-decision press conference, saying that another “unusually large increase could be appropriate” at its next meeting, which will be Sept. 20-21. He also commented that the FOMC hasn’t yet decided on when it will slow its rate hikes. Fed watchers will be on high alert for any hints of when the committee may slow down their rate-hiking pace.
As of their June meeting, the median expectation was for the federal funds rate target range to be at 3.25%-3.50% at the end of the year. That’s 100 bps higher than its current range of 2.25%-2.50%. In early August, St. Louis Fed President James Bullard, one of the more hawkish Fed members, estimated the central bank will need to raise it to 3.75%-4.0% by the end of the year.
“With the uneven, but generally positive, data that has come in over the past 30 days or so, we believe the discussion during the recent Fed meeting was animated,” Brendan Connaughton, managing partner at Catalyst Private Wealth, told Seeking Alpha. “We are still in the camp that the Fed will go 75 bps at the next meeting” due to the recent tone of Fed member comments, he said.
Any talk of recession will be of particular interest. Although the officials didn’t provide updates to their economic projections at this meeting, there’s sure to be discussion of how the economy has changed since their last meeting. Keep in mind the meeting occurred just before the Commerce Department announced that GDP fell for a second straight quarter in Q2.
What does this mean for markets? Given the time of year and the earnings that are still being reported, Connaughton doesn’t see big moves in either direction for the capital markets in the near term, i.e. three months. “Net-net, we are constructive on the equity markets generally, at least domestically,” he said. “We are less attracted to bonds, although still believe in their risk-mitigating characteristics.”