Attention Shifts To Fed Minutes: Volatility May Resume This Week, Markets Do Not Expect 2 More Hikes

Investors are eagerly anticipating the release of the Federal Open Market Committee (FOMC) meeting minutes for June, scheduled for Wednesday, July 5, following the Independence Day holiday.

This important report is seen as a key source of information on the Federal Reserve officials’ intentions regarding interest rate hikes in the second half of the year and is expected to produce impacts across major assets, including the stock market.

Fed Minutes: Key Areas of Focus for Investors

In June, the Fed maintained the funds rate target at 5%-5.25% following a streak of consecutive rate hikes since March 2022. However, the updated economic projections suggest rates may reach 5.6% by year-end, thus suggesting two more increases.

Fed Chair Jerome Powell recently reinforced the view that the board is leaning towards two rate hikes and hasn’t ruled out consecutive-meeting rate increases. The Fed Chair also signaled that a period of below-trend growth and steady-high interest rates would be needed to bring inflation down to the target.

The latest economic projections from the Fed indicate that the fed funds rate is expected to gradually fall to 4.6% in 2024.

The minutes of the June meeting are likely to confirm the strong board consensus of two additional rate hikes in response to persistent core inflation.

Furthermore, the minutes may reveal the board’s intention to keep interest rates higher for an extended period of time, with a rate hike possibly delayed until the end of the first quarter or second quarter of 2024, if inflation falls towards the desired trajectory.

Volatility May Resume As Two Rate Hikes Are Not Priced In by the Market

Currently, the market does not fully anticipate the Fed’s plan for two further rate hikes. While a rate hike in July is widely expected, there is still insufficient consensus to price in an additional increase in September.

According to the CME Group FedWatch tool, which indicates the market’s implied probabilities of future Fed rate movements, the likelihood of a consecutive 0.25% rate hike in September hovers around 19%.

If the minutes show a broad consensus for two or more rate hikes in 2023, as is likely, market volatility may reemerge from the need to reprice the new context.

The repricing higher for a September rate hike could cause short-term Treasury yields to rise, which would be generally positive for the dollar but negative for stocks.

The S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust SPY, is currently trading at its highest since the last week of April 2022.

The tech-heavy Nasdaq 100 Index, as tracked by the Invesco QQQ Trust QQQ, has almost fully recovered its March 2022 levels, effectively erasing all losses caused by the Federal Reserve’s 5 percentage point cumulative rate hikes.

Chart: S&P 500 and Nasdaq 100 Have Rallied Back To The Early Stages Of The Fed Hiking Cycle