In the face of a robust US economic outlook, the upcoming Federal Open Market Committee (FOMC) meeting is expected to leave interest rates unchanged, according to recent predictions. Despite strong growth and inflation data, which some interpret as hawkish, the FOMC is set to continue its “higher for longer” stance.
The tightening of liquidity conditions, equivalent to a rate hike, has been seen recently due to a significant increase in US bond yields reported by the CME Fedwatch tool. This aligns with the sentiments of Fed officials who appear comfortable with higher long-term yields replacing further rate hikes, as stated by Nomura. No additional hikes are anticipated in this cycle.
Fed Chairman Jerome Powell’s upcoming press conference is expected to underline the cumulative tightening that has already occurred. This comes even as the Federal Reserve faces challenges such as persistent labor and inflation data and headwinds faced by average companies and households, despite rapid policy tightening. Morgan Stanley has highlighted these challenges, in addition to pointing out the expansion of the fiscal deficit during full employment, which restricts the Fed’s ability to definitively conclude its tightening cycle.
Recent job gains acceleration, a more resilient underlying trend, and positive backward revisions suggest enduring economic growth strength. However, Dalma Capital anticipates that while immediate action from the US Fed is unlikely, it will need to address inflationary pressures soon due to these factors.
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