The much anticipated Federal Reserve announcement is coming tomorrow, July 27th. The Fed is widely expected to raise interest rates by another 75 basis points and could even surprise markets by sounding even more unrelenting about their tightening policy. They are trying their best to combat inflation without sending the economy into a recession. A 75 basis point hike would put the Fed funds rate in a range of 2.25% to 2.5%.
Investors will be looking for guidance from Powell on what the Fed could do at its next meeting in September. At one point, markets were expecting a full 100 bps (1%) hike, but Fed officials dismissed that view.“I do think they’re going to lean a little bit more hawkish on September,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. “They’re just not seeing the progress on inflation.”
The Fed is expected to provide fresh commentary on the economy as well, which is may acknowledge is slowing. “There’s going to be a lot of two-handed economist talk from Jay Powell,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “He’s going to say we’re definitely going through a soft inventory and trade cycle.” While our slower economic growth will most likely be acknowledged, chairman Powell might say that there is support for the economy as the labor market is still strong. However, it will most likely be another quarter of GDP decline, so Powell’s thoughts will be a mixed bag.
The Fed’s meeting ends on Thursday, the eve of the release of second-quarter GDP, which is expected to be declining. This would suggest that the economy is heading for a recession, with some believing that would prove that we are already in one with two straight quarters of declining GDP. Traders are betting that the Fed will ultimately cause a recession with its aggressive policy tightening.