The Market Thinks the Fed Will Pause in June and Hike One Final Time In July

June 9, 2023

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1:15 pm

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31 comments

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Economics

The Fed meets on June 14. The market expects a pause. Odds are from CMEFedwatch.

Target Rate Probabilities for July

Looking Ahead to July

For the July 26 meeting, the market sees a 63.6 percent chance of at least one interest rate hike, with a 36.4 percent chance of no change from the current target rate range of 5.00 to 5.25 percent.

September is roughly the same as July with 59.5 percent chance of at least one hike from the current target rate range of 5.00 to 5.25 percent.

Things change in November.

Assuming the Fed gets another hike in June or July, the market anticipates at least one quarter-point cut by November.

Weighted Odds

I like to do a weighted odds calculation before and after each FOMC meeting to see how much things change after the FOMC press conference.

Look for that post next Wednesday or Thursday.

This post originated on MishTalk.Com.

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31 Comments

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fornow

10 months ago

Another excellent thought provoking Article.

Six000mileyear

10 months ago

The yield on the US 10 yr bond has been range bound for 7 months now, so the Fed will follow the market’s pause.

Bam_Man

10 months ago

If there is a pause this month, I would expect the Gold price to react strongly to it.

blacklisted

10 months ago

One of the biggest factors impacting inflation is WAR, yet no one in the lamestream media ever mentions it. One should have noticed that the Fed started hiking right after the fraudulent war in Ukraine started. Who thinks the war in Ukraine is not going to expand, when most of the west is doing everything they can to turn it into WWIII?

The WEF nutjobs need WWIII to justify defaulting, depopulation, and digital dollars to track and tax anything that moves. The mother WEFers and the Neocon’s actually believe they can bring regime change to Russia and China to fulfill their One World Govt nightmare. Rates are going higher because it’s all about WAR.

Doug78

10 months ago

Reply to blacklisted

What war?

Salmo Trutta

10 months ago

The economy is being run in reverse. The
payment of interest on interbank demand deposits suppresses interest
rates. It stokes asset prices, housing, stocks, etc. It
causes income inequality, lower standard of livings, and a rentier
economy. It’s Marxism.

Banks
don’t lend deposits. Ergo, bank-held savings are impounded. You get
higher real rates of interest for saver-holders by driving the banks out of the
savings business, by activating monetary savings (and simultaneously tightening
bank credit). This doesn’t reduce the size of the payment’s system
and it makes the banking system more profitable.

WarpartySerf

10 months ago

Let’s start the counterfeiting (“cutting”) all over again ….. It’s the American way.

ajc1970

10 months ago

Reply to WarpartySerf

they will, once the banks have the opportunity to pickup cheap homes from mortgage defaults. give the cycle its time.

Directed Energy

10 months ago

When do they start cutting, so that people can refi and/or move?

Captain Ahab

10 months ago

Reply to Directed Energy

I seriously doubt that real interest rates will go negative again for a very long while. Real rates likely stay around 2-3%. With 2-3% inflation, the housing interest rate should be in the vicinity of 5-7% for the long term.

Karlmarx

10 months ago

What would be the logic to pausing in June and hiking a month later? Isn’t the idea to slow the economy being that a hammer is really the only took the Fed is willing to use?

I have been forecasting at least one more hike and I still think it would make sense to June in order to garner more credibility. Also, politically it would make more sense to get a recession going now so that the country would be recovering by election time thus giving the administration another talking point on how stellar its economic policies are.

worleyeoe

10 months ago

Reply to Karlmarx

I’m going to say they have some level of inside knowledge on what the inflation data is going to look like.

Keep in mind that this month’s June’s inflation reported in July may well be the floor for YoY comparisons for most if not all of 2023. Since inflation peaked last June, this means the May and June CPI data MAY be the last for shrinking YoY comparisons. But so long as MoM stays somewhat elevated which is likely then July and going forward will see the YoY comparisons start to widen, making a portion of reading the CPI tea leaves look more inflationary.

It’s hilarious that anyone, most importantly the Fed, would expect core CPI inflation to move anywhere near 2% with all of the deficit spending that’s expected over the next two years.

Karlmarx

10 months ago

Reply to worleyeoe

Agreed – pretty much everything the Fed is doing to reduce inflation is being more than offset by Fiscal policy.

Salmo Trutta

10 months ago

Money demand is still high, M2/GDP.

M2/Gross Domestic Product | FRED | St. Louis Fed (stlouisfed.org)

Shadowstats: “The most-liquid “Basic M1” (currency plus Demand Deposits) held 118.1% above its Pre-Pandemic Level and is increasing year-to-year,” I.e., velocity is increasing.

But the proxy for R-gDp is decreasing. It could become negative in the 2nd qtr. of 2023. I.e., M is being offset by Vt.

Salmo Trutta

10 months ago

As Dr. Milton Friedman posited; From Carol A. Ledenham’s Hoover Institution archives: “I would make reserve requirements the same for time and demand deposits”. Dec. 16, 1959.

Link: Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements (stlouisfed.org)

“imposing high reserve requirements for zero-interest paying reserves may seem quite attractive to a policymaker interested in reducing the inflationary consequences of fiscal dominance.”

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves.

The first rule of reserves and reserve ratios should be to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. Monetary policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size.

Doug78

10 months ago

Inflation is relenting so you can make a case that the rises are almost over. Now we have to look at something equally as important, namely when the rates come down, how far down will they go. Will they end up at positive real rates this time around or not. My money is on the yes they will.

MPO45v2

10 months ago

Reply to Doug78

CNBC flashed a chart this morning about demographic spending. It had boomer generation leading all consumer spending, the note was it was largely social security driven spending. I’m trying to find a copy of the chart but it fits with my thesis that “free government money” for social security recipients is what has been driving the economy this year.

The rolls of those on social security will only increase over time, especially the next 7 years, so not so sure about inflation disappearing beyond a short blip but we’ll see. Right now it’s the boomers that are driving inflation.

MPO45v2

10 months ago

Reply to Doug78

I found the chart! It was actually “traditionalists” which are the boomer+ generation that was leading spending with boomers second. So the economy is driven by the elderly right now.

link to business.bofa.com

worleyeoe

10 months ago

Reply to MPO45v2

I’m Gen X. It’s pretty hard to imagine my generation is the lowest, but I guess we’re just good at saving money or at least not over using credit cards.

MPO45v2

10 months ago

Reply to worleyeoe

Gen X is also the smallest generation so it will always be lower than the others.

Call_Me

10 months ago

Reply to MPO45v2

It is odd to see how varied the length of generations is from source to source. Boomers get extra years and X gets truncated, but they are all arbitrary lengths. Except for the Xennials – those are fixed endpoints 🙂

Call_Me_Al

Doug78

10 months ago

Reply to MPO45v2

Don’t worry. Your generation will inherit lots of assets and if you work in the health or the insurance field you will be racking it in as Boomers get sick and have to spend like crazy to stay alive a bit longer.

TexasTim65

10 months ago

Reply to Doug78

Why would they come down? Rates are still low by historical standards so technically they could stay around this level for a very long time.

We already know what happens when rates get really low (<2%). We get excessive speculation which is what anyone with an ounce of common sense would expect. The Fed is probably not eager to go back anywhere close to that again anytime soon.

Doug78

10 months ago

Reply to TexasTim65

I expect them to come down a bit and then stay there in real positive territory for the foreseeable future and hopefully for years. Real negative interest rates are not normal and historically rarely existed for long.

TexasTim65

10 months ago

Reply to Doug78

What would you think is a bit? As I said, they are low now at 5% by historical standards.

They need to be above inflation or else they are negative interest rates. If inflation is 3% going forward (and it’s hard to imagine it’s going to get any lower than that anytime soon) then 3.5% would seem to be about as low as they can get them.

Doug78

10 months ago

Reply to TexasTim65

A couple of 1/4 point hikes then a 1/4 cut and then no change for at least a year or two. After that who knows but the era of negative real rates is over. Us oldsters will just love loading up with Treasuries for our declining years. The government deficit needs to be financed and we will step up as long as the interest rate is good. We are a patriotic bunch.

Call_Me

10 months ago

Reply to TexasTim65

The rate may come down because interest on the debt that the federal government is carrying is becoming too large of a burden. in FY 2023 it will be in the neighborhood of 40% of all personal income tax collections!

Call_Me_Al

Zardoz

10 months ago

The market thinks stocks and houses only go up. Probably believes in leprechauns and their pots of gold too.

Ultracrepidarian

10 months ago

Don’t forget how wrong the market has been all year in judging what Powell is going to do…..

ThinkEconomically

10 months ago

This whole idea of it being so planned out makes me laugh. November cut ? Where is my emoji for hand over face ?

MPO45v2

10 months ago

I expect a hike but a pause now and hike later works for me too. As long as those t-bills keep paying 5% + I’m giddy with profits.

The Market Thinks the Fed Will Pause in June and Hike One Final Time In July

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