End of US Interest Rate Hikes?...Fed Officials Speak Out Amid Growing Expectations

"It is finally a sufficient crack to be confident that the tightening cycle is over." As slowdown signals were confirmed even in the hot U.S. labor market, expectations for the end of the Federal Reserve's (Fed) tightening have once again surfaced. Amid optimism that further rate hikes are unlikely, Fed officials are set to speak one after another this week. With the September rate hold becoming a foregone conclusion, attention is focused on their economic and inflation assessments.

[Image source=Reuters Yonhap News]

According to the Chicago Mercantile Exchange (CME) FedWatch on the 3rd (local time), the federal funds futures market reflected over a 94% probability that the Fed will hold rates steady in September. Just a week ago, the outlook for a September hold was in the 80% range, but after last week's employment and inflation data releases, it surged into double digits. The probability of a November hold also jumped from the mid-40% range a week ago to the mid-60% range on this day. Although the Fed's June dot plot indicated the possibility of one more rate hike this year, investors are strongly favoring a scenario with no further rate increases in 2023. The chance of one or more hikes this year has dropped to the 30% range.

This follows the August employment report released on the 1st, which showed the U.S. unemployment rate rising to 3.8%, the highest level in about a year and a half, and wage growth slowing more than expected. This confirmed signals that the previously hot labor market is cooling down. The July core Personal Consumption Expenditures (PCE) price index, a key inflation gauge monitored by the Fed, also matched expectations at 3.3%. Cameron Crise of Bloomberg commented, "At this point, there seems to be no need for the Fed to raise rates again." The remaining Federal Open Market Committee (FOMC) meetings this year are scheduled for September, November, and December.

This expectation of the end of tightening has sharply pulled down the yield on the U.S. 2-year Treasury note, which is sensitive to monetary policy. Bloomberg highlighted the buying pressure on the 2-year note following the employment report, reporting that "major bond market players from BlackRock to PIMCO are confident that the Fed's tightening cycle is over." Jeff Rosenberg, BlackRock's Chief Fixed Income Strategist, described this as a 'Screaming buy.' Michael Kozil, Portfolio Manager at Pacific Investment Management Company, said, "The bond market is reassured by the view that the Fed may have ended the tightening cycle."

However, even if the Fed holds rates steady as expected at this month's FOMC, it is unlikely to declare the end of tightening. Earlier, Fed Chair Jerome Powell confirmed at the Jackson Hole meeting late last month that the option of further rate hikes remains on the table. CNN reported that "Powell likened the June tightening cycle to a car that slows down as it approaches its destination," suggesting that the Fed might pause (hold) in September and raise rates again in November. The recent rebound in oil prices, which could add to inflationary pressures across the economy, is also a factor that may weigh on future Fed policy decisions.

Market attention is focused on the remarks of Fed officials. This week, speeches by Fed's third-ranking official John Williams, President of the New York Federal Reserve Bank, and other officials are scheduled one after another. While hawkish (monetary tightening-favoring) officials continue to argue for additional hikes citing persistent high inflation and an overheated labor market, dovish (monetary easing-favoring) officials are expected to emphasize that rates have already been raised sufficiently. The Fed has previously raised the U.S. benchmark interest rate to 5.25-5.50%, the highest level in 22 years.

On the 6th, Boston Fed President Susan Collins, who has hinted at the need for further rate hikes, will speak. Michelle Bowman, a Fed Governor also considered a prominent hawk, will speak the following day. Dallas Fed President Lori Logan, who is scheduled to speak twice this week, has recently made hawkish remarks and is regarded by major foreign media as the most likely to oppose a pause in rate hikes.

On the other hand, Chicago Fed President Austan Goolsbee, Philadelphia Fed President Patrick Harker, and Atlanta Fed President Raphael Bostic, all considered prominent doves, will speak on the 7th. Additionally, Vice Chair Michael Barr, who oversees bank supervision, is also scheduled to speak this week. Key indicators including the Fed's Beige Book, S&P Global Services Purchasing Managers' Index (PMI), Institute for Supply Management (ISM) Non-Manufacturing PMI, and trade balance will also be released this week.