Tensions are high ahead of the Federal Reserve’s upcoming Federal Open Market Committee (FOMC) meeting, set for May 2-3. Indeed, some economists believe the central bank may opt for its last rate hike of the year this time around. Will the stock market crash?
Well, depending on the tone of the meeting and, more predominantly, of Fed Chair Jerome Powell, equity markets could be in for a tumble. While economists believe the central bank’s rate-hike campaign could be coming to an end, nothing is set in stone. If there’s anything Powell loves, its a hawkish subversion of expectations.
As it stands, most members of the Fed currently predict there will be just one more interest rate increase this year. In fact, as per the latest polling, 10 Fed officials project there will be one more rate hike this cycle. Meanwhile, three Fed members project two more rate hikes, three other officials predict there will be three more rate hikes and just one person expects four more hikes. Finally, just one Fed official believes the central bank is done raising rates.
According to the March Summary of Economic Projections, most Fed officials also believe elevated inflation is likely to linger on until as late as 2024, with risks to core inflation overly weighted to the upside.
Kathy Bostjancic, Chief Economist at Nationwide, told Bankrate:
“They may or may not be right with that risk assessment, but it tells you a lot about where they’re willing to [err] […] They’re willing to [err] on the side of higher interest rates because of the risk of inflation being higher.”
What else do you need to know ahead of the Fed’s upcoming rate-hike decision?
Stock Market Crash Fears Sing Up Ahead of FOMC Meeting
The major fear surrounding additional rate-hike increases is the potential for wider economic deterioration. In that regard, the U.S. economy is seemingly just starting to feel the pinch of elevated interest rates.
This week, a number of economic data releases showed that, while prices may be starting to ease, it’s clearly not without costs like economic growth and consumer spending. Indeed, first-quarter GDP was released just this week and came in underwhelming.
Despite Wall Street consensus projections for about 2% GDP growth in Q1 2023, annualized GDP slowed to 1.1%, as per the Bureau of Economic Analysis.
On the flip side, Personal Consumption Expenditures (PCE) — the Fed’s preferred inflation gauge — showed notably higher prices than projected, 4.2% versus the 3.7% expected. While this is still a deceleration from February’s 5.1% inflation level, it’s also more fuel to the Fed’s hawkish fire.
Ryan Belanger, founder of Claro Advisors, wrote the following about the report:
“Friday’s inflation report gives the Federal Reserve an excuse to hike interest rates by 25 basis points at the May meeting, even though there is a growing chorus among investors for the Fed to pause its rate hikes given worries about the economy.”
Belanger isn’t alone in his estimations. Interest-rate futures are currently pricing in a roughly 92% chance the central bank raises rates 25 basis points at its May meeting. That’s up from an 84% reading just days ago.
The Federal funds rate is sitting at a range between 4.75% and 5%, the highest level since 2007. With interest rates only liable to keep going up, fears of a Fed-induced recession have only continued to rise.
“Not only is it a concern, but the odds favor it,” said Greg McBride, Bankrate Chief Financial Analyst, “Look at the last three [tightening] cycles: Two of them ended in recessions, and the one that didn’t was an economic slowdown, where they had to reverse course and start cutting rates. History is not on their side.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
