The Fed Could Surprise Markets Today

The Federal Reserve is widely expected to raise interest rates by another three-quarters of a point Wednesday, and it could surprise markets by sounding even more unrelenting about tightening policy. That means the Fed would sound “hawkish,” or in a mode where it is bent on raising interest rates as much as it needs to in order to curb inflation. The central bank is expected to announce the rate hike Wednesday at 2 p.m. ET. Fed Chairman Jerome Powell then briefs the media at 2:30 p.m. ET. A 75-basis point, or three-quarter point, hike would put the fed funds rate in a range of 2.25% to 2.5%. The Fed started raising interest rates in March when the fed funds range was zero to 0.25%.


Investors will be looking for guidance from Powell on what the Fed could do at its next meeting in September. For a period this month, markets had even braced for a full-point hike, but Fed officials discouraged that view. “I do think they’re going to lean a little bit more hawkish on September,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. “They’re just not seeing the progress on inflation.”


‘Two-Handed Economist Talk’


The Fed could provide fresh commentary on the economy, which it may acknowledge is slowing. “There’s going to be a lot of two-handed economist talk from Jay Powell,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “He’s going to say we’re definitely going through a soft inventory and trade cycle.” Reinhart said while Powell should acknowledge slower growth, the chairman may also say that there is fundamental support for the economy. The labor market is still strong though jobless claims have begun to rise. “I think it’s going to be a mixed bag. He’s going to be talking ahead of what could be another quarter of real GDP decline,” Reinhart said.


Long Term Outlook


A CNBC FED survey estimates a terminal rate at 3.83% by March 2023. But then it estimates that the rate will be DROPPED by the end of 2024 to about 2.85%....almost a 100 basis points drop. This is critically important to factor in when obtaining a mortgage: getting an adjustable rate shorter term mortgage now with the plans of refinancing in a few years may be wisest. Yes, prices may come down a bit, but when the economic recovery happens (combined with lower building due to economic pullback) you could expect prices to SOAR again.

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