【Analysis】July FOMC Meeting Preview: The End of Rate Hikes?

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The highly anticipated Federal Open Market Committee (FOMC) meeting will be held on July 25 and 26 in the United States, during which the Fed will announce its decision on interest rates.

The market believes there will be a 25bps rate hike, signaling the end of the current rate hiking cycle. If that's true, the strongest and fastest rate hike process in history may come to an end.

Some investors may ask: Is this a good time to invest in US stocks? Does it mean that economic recession will no longer happen? If the rate hike ends, will interest rate cuts be far away?

In today's analysis, we will preview the FOMC meeting in July and find the answers.

Conducting the nation's monetary policy is one of the Fed's five key functions. The primary goal of the policy is to achieve maximum employment and price stability.

During COVID-19, the Fed implemented QE (Quantitative Easing) to stimulate economic growth. Its purpose is to provide additional stimulus by lowering long-term interest rates and increasing the liquidity of the financial market.

The goal was achieved when the economy recovered. But meanwhile, reducing interest rates also brought a side effect, inflation.

In June 2022, the CPI, a measure of US inflation, hit a record high for the past 40 years, forcing the Federal Reserve to increase interest rate hikes.

With the target federal funds rate soaring, we wonder when all these will end.

Actually, there are standards to decide whether the goal has been achieved.

Regarding price stability, the Fed targets reducing inflation to 2%. Regarding achieving maximum employment, the Fed pays attention to various indicators such as nonfarm payrolls, unemployment rates, job openings, etc.

If the Fed achieves the 2% inflation rate or sees signals of a sluggish job market, it will probably stop raising interest rates.

As to when it will happen, it is up to the FOMC to decide.

The FOMC holds eight regularly scheduled meetings per year. The June meeting marks the sixth gathering of this year, at which Fed officials decided to hold off on raising interest rates after enacting ten straight rate increases.

We mainly use four tools:

- The Federal Reserve Dot Plot

- Market Expectations (FedWatch)

- Economic Indicators

- Recent Speeches of Fed Officials

Here is the Fed economic projection for June 2023 dot plot:

How to read itThe dot plot shows the expectations of the 12 Federal Open Market Committee members for future changes in the federal funds rate.Each dot represents the expectations of one Fed official.

Taking the year 2023 as an example, the median on the dot plot is between 5.5%-5.75%, indicating that the federal funds target rate could be within this range over the year.

Currently, the rate is in the range of 5.0%-5.25%. Some Fed officials expect a 50-bps hike.

If a 25-bps hike is raised in July, will rates continue to rise after September? We can't make accurate predictions. But we may find some clues elsewhere - the monetary policy is constantly changing based on market data.

What about market expectations? We often use the CME FedWatch Tool to analyze the potential Fed rate changes.

Note: It is an indicator primarily used to determine market attitudes towards interest rate changes and can't predict the federal funds rate with 100% accuracy.

The numbers in the orange box indicate that the market believes the target rate will remain in the 5.25%-5.50% range at future meetings and that there may be a 25bps hike from current rates.

FedWatch shows that as of July 24, the market believes there is a 99.8% probability that a rate hike will be announced at the upcoming meeting, ending the current rate hiking cycle.

The third tool, economic indicators, shows the reasons behind the Fed's rate hike. Take this June as an example:

- Employment: The unemployment rate was at a historic low of 3.6%.

- Retail: The growth rate was lower than expected compared to the previous month, but the robust job market will probably boost yearly consumer spending.

- CPI: A fell more than expected but still slightly exceeded the Fed's target of 2%.

Currently, the US economy remains resilient, supporting a resumption of rate hikes at this FOMC meeting.

Finally, let's take a look at the attitudes of Fed officials.

Fed Chairman Jerome Powell said at a congressional hearing in June, "Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace."

Therefore, the Fed's last rate hike is likely to come at the July meeting.

To find the answer, let's return to the dot plot we discussed above. The target rate given by the Fed shows a downward trend, indicating that interest rate cuts may start next year.

Another piece of evidence can be found on FedWatch. Numbers in the red box indicate that the market believes the interest rate may start to fall from next April.

However,the information is only for reference. Themonetary policy isconstantly changing, and whetherthere will beinterest rate cuts depends on future economicsituations.

Here are some data and professional views:

Overall, if the July FOMC meeting marks the last rate hike, one of the restrictions for the US stock market will be removed. But looking ahead, whether or not the US stock market will rise further may depend more on the fundamentals of individual listed companies. With economic data diverging from the stock market, the stock market is likely to be more volatile. Investors need to be more cautious when making investment decisions.

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