Are Interest Rates Heading Higher?

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Our View

Last month, the Federal Reserve raised interest rates “to a range of 5.25% to 5.5%, the highest the Fed target rate has been since 2001.”

However, over the weekend Fed Gov. Michelle Bowman said interest rates would likely need to go higher in order to satisfy the Fed’s inflation goals. She said:

“The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2% goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level.”

She added that, “additional rate increases will likely be needed to get inflation on a path down to the 2% target.”

Interesting.

Admittedly, inflation is still a problem (although it’s trending in the right direction) and notably, the market is not really pricing in a rate hike at this point. For that matter, it’s not pricing in a rate cut either.

The Federal Funds futures are pricing in about an 85% chance of “no hike” in the September meeting (and about a 15% chance the Fed raises by another 25 basis points). In December, its largest probability is for rates to remain unchanged from today’s levels, (at 61.7%). However, there are some probabilities of rate cuts and hikes, as shown above.

Finally, will it even matter?

The Fed has been hiking rates throughout the year, but the S&P has been storming higher. At the recent highs, the index (SPX) was down just 4.4% from its all-time high. Even after last week’s correction, it’s down just 7.2%.

That’s not to say we can’t endure a larger correction, but I’m just pointing out that the “Don’t fight the Fed” rhetoric has been silenced by the “Don’t fight the trend” chants.