When Will The Fed Stop Hiking Rates?
The Fed is meeting set to make their next rate move.
It may be the most pivotal Fed meeting yet by signalling the rate hikes are winding down.
That’s exactly what the market is hoping for them to do.
But it’s going to take some time.
The Fed likely won’t stop hiking rates well into 2023 (and a recession is more than obvious, even to the “transitory” inflation crowd).
Here’s why we expect that to be the case.
How The Pros Predict The Fed's Next Move
The Fed has focused on showing how serious it is about taking on inflation.
It has one blunt object to do so – short-term interest rates.
Higher rates slow the borrowing and lending flywheel of a modern, financialized economy.
We can debate the merits of financialization, but not today.
We are focused on reality and results, not an Austrian economic ideal of stable money supply.
So, in order to get the best idea of when that is coming, we turn to the wisdom of the crowd.
The best way to do that is with the FedWatch Tool.
This tool is a tremendous predictor of the Fed’s next moves because it’s based on interest rate futures markets.
Interest rate futures are contracts which allow institutional investors to bet on and hedge against future rate moves.
They trade on the CME Group’s exchange (formerly the Chicago Mercantile Exchange) and make up one of the largest and most liquid markets in the world.
For us, this market shows exactly what the big money investors expect the Fed to do in clear, easy-to-understand probabilities.
Take the Fed meeting this week as an example.
The Fedwatch tool tells us there’s a 78% probability of a 50-point rate hike.
Here’s the chart that shows the probabilities of a 50-point and 75-point hikes:
The 78% probability is a 50-point hike and the 22% probability is for a 75-point hike.
That all feels about right.
The Fed is probably going for a 50-point hike, but the door is open to slightly more severe action.
The market knows that.
But here’s where the real value is when it comes to getting a good idea of when the rate hikes will end.
When Will The Fed Stop Hiking Rates?
Everyone is waiting for the Fed to pivot away from its rate hikes.
You’re going to be hearing a lot of that word – “pivot” – in the months ahead.
And here’s how you can use the Fedwatch tool to get ahead of it all.
There are interest rate futures contracts for all of 2023.
As a result, the Fedwatch Tool can discern a probability of the Fed’s moves that far out too.
Here’s where the market expects the Fed to have set interest rates by it’s July 2023 meeting:
Although the tool doesn’t have as high a degree of confidence as it does when the Fed move is a few days away, there’s still high confidence in reasonable ranges.
Here we’re looking at the July 2023 meeting.
The FedWatch Tool gives a 67% probability of the Fed funds rate to be between 4.75% and 5.25% by July.
The current Fed rate is 3.75%-4.00% and if we assume a 50-point hike this week, that means there’s only 50 to 100 more basis points to go.
This would signal the end of the rate hike cycle.
It’s quite plausible too.
By July a recession will likely be in full swing, money supply would be declining, and prices aren’t rising very fast any more.
That could be the turning point you’re not going to want to miss either.
Conclusion
Next summer the Fed will resume a new cycle of lowering rates.
The stage will be set for another Great Reflation.
At that time the value of earnings, cash flows, and dividends (and therefore stock prices) will become increasingly valuable.
That’s the new bull market.
And it will be the time for investors who focus on finding the big growth opportunities and deep value plays in the interim to cash in.
