Ahead of the Fed’s interest rate decision tomorrow at 9:00 PM (2 p.m. ET), expectations that the policy rate will remain unchanged are gaining strength in the markets, but this prediction, like previous ones, is not nearly certain. Market forecasts are pricing in a roughly 80% probability of the Fed not changing rates at its July meeting, and a 19% probability of a 25 basis point increase.
The Federal Reserve, ahead of its second policy meeting under Chairman Kevin Warsh, has kept its benchmark interest rate stable at 3.50–3.75 percent since December. Recent increases in energy prices and hawkish statements from some Fed officials have raised the likelihood of an interest rate hike in futures markets.
However, lower-than-expected inflation data and a renewed lull in hostilities between the US and Iran suggest that the threshold for a Fed rate hike this week may be higher than what markets are pricing in.
Economists note that if the Fed raises interest rates after a long period of waiting, it will not be seen as a one-off action. Historically, when the Fed begins an interest rate hike or cut cycle, it usually continues to move in the same direction for several meetings.
Therefore, a potential interest rate hike could be perceived by investors as a strong signal that further increases may be coming in future meetings. However, it is thought that FED officials may not yet be ready to commit to such a series of interest rate hikes.
James Bullard, former St. Louis Fed president and dean of Purdue University’s Mitch Daniels School of Business, also said that the Fed doesn’t usually make one-off interest rate changes. Bullard stated that the policy board needs to decide whether it’s ready to begin a series of rate hikes, adding, “I don’t think they’re ready to do that at this meeting.”
*This is not investment advice.