Fed Watch: Here’s What The Fed Will Do Today

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SUMMARY: The Federal Reserve is widely expected to hike rates by 75bps on Wednesday, taking the target range for the Funds rate to 2.25-2.50%, a level considered neutral. There is no Summary of Economic Projections at this meeting thus attention will turn to any guidance the FOMC provides on future tightening increments. Current expectations, based on the current outlook, are for a 50bp move for September, before moving to 25bp moves in November and December to see a year-end rate of 3.25-3.50%, in line with market pricing. Nonetheless, the Fed will likely reiterate that any future rate decisions will depend upon their assessment of the economic outlook, particularly inflation. 

The latest June CPI report was hotter than expected which saw markets price in another 75bp move in July before accelerating to start pricing in over a 70% probability of a 100bp hike instead. However, pricing has now pared back in wake of several Fed speakers, including hawks Bullard and Waller, vocally supporting a 75bp hike in July while the latest UoM consumer inflation expectations also cooled for both the 1yr and 5yr horizons. Currently, markets only see a 10% chance of a 100bp move, as opposed to above 70% at the peak.

EXPECTATIONS/GUIDANCE: The Fed is expected to hike rates by 75bps to 2.25-2.50%, according to 98/102 economists surveyed by Reuters between July 14-20th, although the remaining four still expect a 100bp move. However, markets are in favor of a 75bp hike with only a 10% chance of a 100bp move on Wednesday. Looking ahead, the majority of those surveyed expect the Fed to hike by 50bps in September, before slowing further to 25bp hikes in November and December leaving the Fed funds rate at 3.25-3.50% in December.

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