Markets Expect Fed Rate Hike to Resume in July, Cut to Begin in Mid-2024

Top investment banks and institutions now expect the U.S. Federal Reserve to resume raising interest rates by another two more quarter-point hikes beginning July, with most not expecting cuts to begin until well into 2024.

After a two-day meeting, the Federal Open Market Committee (FOMC) opted to keep interest rates unchanged on Wednesday. However, the FOMC statement suggested that policymakers would get back to monetary tightening by referencing the “extent of additional policy firming that may be appropriate,” which is likely to result in two small rate hikes before the end of this year.

The U.S. central bank maintained its policy rate at 5.00%-5.25%, in line with expectations from the market. This is the first pause since the beginning of the cycle of hikes in early 2022, and it was carried out in order to “assess additional information and its implications for monetary policy.”

Fed Chair Jerome Powell described in a press conference after the meeting, stating that U.S. growth and the job market are holding up better than expected under the weight of the aggressive monetary policy tightening this past year.

According to a Bloomberg survey, 70% of all respondents believe the Fed has not finished its rate-hiking campaign that began in March 2022 as inflation rose amid the pandemic, while 30% said rates have peaked.

When asked how soon they expect the Fed to begin lowering rates, over 56% said the central bank is unlikely to do so until the second quarter of 2024 or later, while roughly 35% predicted that rates would drop in the first quarter next year.

Goldman Sachs said it still expects another hike in July, bringing the current rate to 5.25%-5.50%, but that the hawkish surprise in the dots and the hint at an every-other-meeting pace give it more reason to believe that the FOMC will likely make a possible second hike more in November than September.

Bank of America, meanwhile, forecasts the Fed to deliver another 25 basis point hikes in July and September, based on the rise in the median dot for 2023.