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Next Week's U.S. Federal Reserve Meeting May Be A Game Changer For Markets

By Michael KramerMarket OverviewSep 16, 2022 04:28AM ET
www.investing.com/analysis/next-weeks-us-federal-reserve-meeting-may-be-a-game-changer-for-markets-200629918
Next Week's U.S. Federal Reserve Meeting May Be A Game Changer For Markets
By Michael Kramer   |  Sep 16, 2022 04:28AM ET
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  • The September FOMC meeting is critical as it includes projections
  • This could set the path of monetary policy for the next few months

The Sept. 21 FOMC meeting will be a big one, not because of the size of the rate hike but because of the FOMC projections. The bond and futures markets have repriced dramatically since the July meeting and the hotter-than-expected CPI report. It makes the Fed projections very important, as it will lay out a potential policy path for the remainder of 2022 and 2023. If the Fed gives forecasts that are too low, they run the risk of financial conditions easing, which is not what they want. 

The market may have made the Fed's job easier because the Fed Funds futures now see the overnight rate climbing to a terminal rate of 4.45% by April. The problem lies with what comes next, because currently the market is pricing in rates to fall back to 4.0% by December 2023. That may prove too low for the Fed's liking, given the hotter-than-expected CPI report and calls to hold rates steady for some time. 

30-Day Fed Funds
30-Day Fed Funds

Inflation Remains Too Hot

In June, FOMC projections looked for rates to rise to 3.4% by December 2022 and 3.8% by December 2023. But since that time, CPI data has been hot, and while year-over-year headline CPI has hovered in the 8% range, core CPI has accelerated, rising from 5.9% to 6.3%. The Atlanta Fed 12-Month Sticky CPI rose to 6.2% from 5.6%. What makes matters worse is that the Cleveland Fed now sees core CPI rising by 6.6% in September. 

Cleveland Fed Monthly CPI
Cleveland Fed Monthly CPI

The message is that core and sticky inflation is accelerating while falling energy prices have aided headline CPI fluctuations. These sticky and core numbers are likely to be significant concerns for the Fed, with no sign of easing. On top of that, job growth has remained hot, as noted by the Kansas City Fed Labor Market Conditions Index. 

Kansas Fed Labor Market Conditions
Kansas Fed Labor Market Conditions

The Fed Will Need To Be More Hawkish Than Expected

All of this points to a Fed that is likely to be even more hawkish than it was at the June FOMC meeting. For the Fed to keep financial conditions from easing, it will be left to point monetary policy in a direction that is even more hawkish than where the Fed Fund Futures market is currently priced, which may result in them projecting a 4.5% rate by the end of 2023. 

The Fed has made it clear that once it gets rates to its terminal rate, they will be held at that level until it sees ample data to suggest inflation is easing. That means the current 4% December 2023 pricing is probably 50 basis points too low, and the Fed can use its projections to jawbone the back of that future curve higher.  

The other option, of course, is to come in with a view that is in line with current market expectations but that will leave the Fed open to the backward way markets tend to think. A Fed that is not as hawkish as expected is dovish, which would allow the risk asset to rally, causing financial conditions to ease. 

Nobody ever said this would be easy. 

Disclaimer: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy.

Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Next Week's U.S. Federal Reserve Meeting May Be A Game Changer For Markets
 

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Next Week's U.S. Federal Reserve Meeting May Be A Game Changer For Markets

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Comments (20)
Lazaro Benitez Jaime
Lazaro Benitez Jaime Sep 18, 2022 12:05PM ET
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Thank you for your opinions, for me and for many it is one of the best 🙏
Mohmad Alhajar
Mohmad Alhajar Sep 18, 2022 11:54AM ET
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Saun Melkon
Saun Melkon Sep 18, 2022 10:57AM ET
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Stock market = fraud
Joe Rizzuto
Joe Rizzuto Sep 18, 2022 8:21AM ET
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this fed has made mistake after mistake. they will most likely continue to do so by raising rates to high and to fast.
Saun Melkon
Saun Melkon Sep 17, 2022 10:21AM ET
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What reason is there for stocks to go up from here? Even if interest rates suddenly were to go to zero? Earnings are a derivative of fraudulent accounting (mark to maturity) and fraudulent stock buyback schemes to inflate stock prices. Only thieves and the ignorant would buy stocks now. Thieves, because they have insider information; and the ignorant, because they are willful victims accessory to their own victimization.
Shawn Schecker
Shawn Schecker Sep 17, 2022 10:21AM ET
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Gosh you sound so smart
Invest Right
Invest Right Sep 16, 2022 11:05AM ET
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Agree with the sentiment Michael. The Fed already saw with the July rally that they cannot be perceived as dovish if they are to achieve their objectives of tighter financial conditions and a slower economy.
Casador Del Oso
Casador Del Oso Sep 16, 2022 9:37AM ET
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Excellent article. Funny how some folks still have that dovish pivot embedded in the back of their minds.
Jim Hernandez
Jim Hernandez Sep 16, 2022 9:12AM ET
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Jesus said "look up, for your redemption draweth nigh".
Gonzalo Ribeiro
Gonzalo Ribeiro Sep 16, 2022 9:01AM ET
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FYI: is not nominal rates that provoke this. Real interest rates dictate market's movements. Even if the FED keeps hiking the Federal Funds Rate, real interest rates remain deeply in the negative, which is massively inflationary
Invest Right
Invest Right Sep 16, 2022 9:01AM ET
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Things don't happen in a vacuum. Raising nominal rates is definitely spooking the markets and resulting in lower markets which in turn will increase unemployment which in turn will reduce spending which ultimately is disinflationary.
TALLURI ANJANEYULU
TALLURI ANJANEYULU Sep 16, 2022 8:49AM ET
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FOR MARKETS JUNE LOWS ARE IMPORTANT TECHNICALLY.
Stephen Fa
Stephen Fa Sep 16, 2022 8:49AM ET
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Stop shouting please.
Tony Hall
Tony Hall Sep 16, 2022 8:49AM ET
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It represent nothing more then the next low to be taken out, probably during this month. Do not have wishful thinking that the markets are finished digesting all that is happening accros the globe. I played that game in 2001 and watched my beloved tech stocks drop 90%.
 
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