Is the Fed about to hike last time in 2023 at their next meeting?

In about two weeks’ time, Federal reserve is going to hold FOMC meeting on May 3rd. All eyes around the globe are watching Fed's monetary policy since it will create turmoil in financial markets if the market doesn't like the decision.

Based on CME Fed watch tool, market is now expecting 25 bps hike with 86% chance and the remaining participants expect no hikes on May 3rd. One month ago, only 21% expects a hike and the rest favors no hike or even cutting 25 bps at next meeting. The reason why market was so eager for the cut was the SVB crisis which seems cooling off lately but the ripples effects on lending remains unknown.

From their last meeting on March 22nd, we learned that several FOMC participants were considering pausing rate hikes until banking crisis settled down. And one of the reasons for 25 bps at the end was market was expecting a hike before the participants meet for two days. During crisis time, it's hard to tell whether Federal Reserve is on the driver's seat or the market is.

Fast forward to now, market is expecting 25 bps in two weeks and I see no reasons Federal Reserve won't follow through. The median forecast from last FOMC meeting for terminal rate in 2023 was 5.1%, which is one hike away from where the rate is today. Although we will have updated PCE inflation number and ECI wage growth the week before May 3rd, it's highly unlikely the rate decision will deviate from 25 bps.

Equity Investors should always look beyond at least 3-6 months. What the market should pay more attention to is the expectation for June meeting. Bond market started to price in probability of another rate hike, with 22.2% chance, which means we might see a terminal rate of 5.5% for the upper band. Now that is something almost no one was talking about just one week ago.

Bottomline, May meeting is almost a done deal for another rate hike and June meeting starts to look interesting. Higher rates are not good for equities in the short term, hence equity investors should always pay close attention to the bond market and adjust your risk taking accordingly.