The Federal Reserve has raised interest rates by 5.25 percentage points since March 2022, the latest 0.25% hike coming at the July 2023 FOMC meeting. This marks the fastest pace of hikes the U.S. central bank has had in 40 years and the highest rate since 2001.


The central bank’s tightening cycle is near its end, that is clear, but consequently, three pertinent questions are at the forefront:


  1. Have U.S. interest rates peaked?
  2. When will the Fed begin to cut interest rates?
  3. Is the U.S. economy heading for a recession?


This is the first of a three-part series to answer the aforementioned questions.


The remaining Federal Reserve decisions on interest rates for 2023 will be announced on September 20th, November 1st, and December 13th. The first 2024 decision is on January 31st.


‍U.S. Interest Rate changes since 2022
U.S. Interest Rate changes since 2022



Looking at the CME FedWatch Tool, interest rates point to a 97.0% probability of rates holding in September. This probability drops with an expectation of a 64.6%, 57.6%, and 56.6% likelihood of pauses in November, December, and January, respectively. This implies that market expectation for rates to have peaked is over 50%.


This is consistent with the views of the institutions in illio’s latest market summary research, which is split evenly between further increases and a peak in rates. Five of the twelve institutions expect rates to increase, and five expect rates to have peaked. Two institutions are strictly data-dependent and await further information.

Current interest rate expectations of market institutions


Recent data illustrates clear signals for the Fed that inflation is falling, and the economy is cooling, both are key determinants in peaking rates. The Fed’s preferred inflation gauge has fallen to 3.7% from its peak of 7% last summer. Economic resilience observed by the U.S. is just beginning to slow. At 3.8%, the unemployment rate has reached its highest level since February 2022.


However, the Fed’s previous stance on both data dependency and its 2% target highlights the potential for a further hike in this cycle. The Fed chairmen, Jerome Powell, has previously stated that they will continue with a “data dependent approach” and that “it is the Fed’s job to bring inflation down to the 2% goal, and it will do so.” Annual inflation has now ticked up two months in a row after 12 consecutive months of decline. On a month-over-month basis, August inflation rose by 0.6%, compared to 0.2% in July. Economists had expected the data to show a 3.6% overall increase in inflation compared to a year ago; instead, it came in higher than expected at 3.7%.


Previously this year, when inflation was at 3.3%, and before the two months increases, Powell stated that inflation “remains too high” and the Fed “is prepared to raise rates further until confident that inflation is moving sustainably down toward the objective.”


Strong consumer spending and a persistently tight labour market illustrate that the economy is likely still too strong to bring prices down to the 2% target the Fed aims to achieve. More robust than expected reports on everything from consumer spending to residential investments have led to economists boosting their U.S. growth forecasts.


As well as considering the internal U.S. factors, such as current inflation and unemployment rates, there are two external factors that are also likely to add inflationary pressure. The first is any extension of the recent oil rally, recent OPEC+ cuts have set up the tightest oil market in a decade. The second is that Chinese policy stimulus appears inevitable. Falling prices in China offered the potential to depress U.S. inflation, but a senior Chinese central bank official stated China will avoid deflation this year and the central bank has an “ample toolbox and will use it when needed.” More recently, retail sales growth has jumped, and China has added liquidity into the system.


The Fed has emphasised to the public that it is willing to risk a recession to contain inflation.  Interest rates have, therefore, not peaked, given that inflation remains above the Fed’s 2% target and showing sticky points. Subsequently, expect rates to increase by year-end as the Fed’s battle continues.


* All the opinions stated in these blogs are individual to the writer

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