Live Data Coverage: July Federal Reserve Meeting

[embedded content]

Advertisement

July FOMC Preview:

  • Rates markets are fully pricing in a 75-bps rate hike by the Federal Reserve today, with an outside shot at a 100-bps rate hike.
  • Rate hike expectations have cooled dramatically in recent weeks as a dour stretch of US economic data has traders believing that the end of the rate hike cycle is nearing.
  • We’ll discuss how markets may react to the July Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT on Wednesday, July 27, 2022. You can join live by watching the stream at the top of this note.

75-bps Hike Incoming

The tone deployed by Fed policymakers between the June and July FOMC meetings strongly suggests that a 75-bps rate hike is coming. Some FOMC members even hinted that a 100-bps rate hike would be possible. The near-term rate hike path may be set; Fed policymakers have been quiet about what happens after July.

US inflation rates have pushed higher, though some gauges, particularly the PCE price index – the Fed’s preferred gauge of inflation – have started to ease, leading markets to price in ‘peak’ Fed rate hike odds. While the Fed will continue to raise rates in 2022, 2023 will likely bring forth rate cuts – at least according to markets.

Eurodollar Futures Contract Spread (August 2022-December 2022) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Daily Timeframe (July 2021 to July 2022) (Chart 1)

After the Fed raises rates by 75-bps this week, there is only one 25-bps rate hike discounted through the end of 2022, per Eurodollar spreads. Coupled with movement in the 2s5s10s butterfly, the market’s interpretation of the near-term path of Fed rate hikes has become decidedly less hawkish. As markets are ever-forward looking, this week’s rate hike from the Fed may not be a bullish catalyst for the US Dollar if additional rate hikes this year are not signaled.

Rate Hike Timeline

Fed funds futures tell a different story, however. After the Fed raises rates by 75-bps in July, there is still 75-bps of tightening discounted through the end of 2022. Put another way, there is disagreement among financial market participants about what happens for the rest of this year. This disparity in interpretation can yield volatility across financial markets.

  • July 2022 = 75-bps rate hike (113% chance)
  • September 2022 = 50-bps rate hike (146% chance)
  • November 2022 = 25-bps rate hike (74% chance)
  • December 2022 = no rate hike (81% chance)

We’ll discuss how markets may react to the July Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.

Read more: Central Bank Watch: Fed Speeches, Interest Rate Expectations Update; July Fed Meeting Preview

— Written by Christopher Vecchio, CFA, Senior Strategist

Leave a Reply

Your email address will not be published. Required fields are marked *