This time around, there’s not much mystery whether the Federal Reserve will raise interest rates when it releases its decision on July 26.
A 25-basis point raise has been weighed into markets for some time, allowing the Dow Jones Industrial Average to mark its longest winning streak since at least 2017, led at least in part by the recent strength of the Magnificent Seven stocks.
What requires a little more thought is what the Fed may do after July. During a recent visit to the Action Alerts PLUS investing club, long-time Fed watcher and technical analyst Bob Lang broke down the Fed’s likely actions as Wall Street inches closer to 2024.
FULL VIDEO TRANSCRIPT BELOW:
BOB LANG: I certainly think that the Fed has been talking about it for a little while. We’ve heard a couple of Fed governors out recently saying that, well, listen, you know what, I still don’t have my mind made up for July. However, the Fed funds futures have pretty much made up their minds for them, at a 99% probability now of a rate hike coming up next week. But some of these Fed– some of these Fed governors are hedging their bets right now about where they’re going to be voting for for policy next week.
J.D. DURKIN: Now, that’s July. Can I get your sense on what September might hold? Because most people I talk to say, OK, well, July’s already baked in. But for September, for sure, they’re going to go back to a pause. Are you in that camp?
BOB LANG: Yeah, I certainly– I think September is a pause. I think November is on the table. We have three Fed meetings remaining in 2023, JD. We have a September 1, we have a November 1, and a December meeting. I think that pause is coming in September. And again, there’s about a 35%, 40% probability of a rate hike in November to bring it up to 5 and 1/2% to 5 and 3/4% on the Fed funds rate. December, likely going to be a pause.
But if that rate hike doesn’t come in November, it could be coming into December. And I think that that’s it for the rate hikes for this cycle, certainly, if the data starts coming in better than we’ve had for the past couple of months. And again, those inflation ratings actually weren’t too bad last week. If the data starts coming in a little bit better, we’ll see, potentially pricing in rate cuts in 2024.
J.D. DURKIN: Yeah, and I wonder how much of the overall market optimism we’ve had as of late is based on the fact that now some Fed heads, as Chris Versace likes to call them, have communicated that cuts will be here sooner rather than later. One quick question on Jackson Hole, what do you look for specifically there? And should we expect different type of comments from Mr. Powell than we get at either the regular press conferences or the occasional Brookings Institute event that he does in Washington?
BOB LANG: So we have to go back a year and remember what the markets did after Powell parsed out some comments about Fed policy and about the economy in August of 2022. The markets did not like it. They’ve dropped about 4% that day. It was a stunning move down, a big huge reversal. And are we expecting something like that to happen? Of course, we don’t expect that, especially we are a year later and we are– inflation is down. And the tools that the Fed uses to fight inflation, obviously Fed funds– Fed funds rate actually have become quite effective in reducing prices across the economy.
So I don’t expect too much fire– too many fireworks from the Jackson Hole conference, which is in Wyoming. And it’s hosted by the Kansas City Fed. But I do expect to hear some comments from some other central bankers from Europe and from Japan, also contributing to the conversation about how their efforts to control prices and inflation are working for their economies as well too. But I certainly think that Powell doesn’t really need to drop a bomb. But we never know if he wakes up on the wrong side of the bed, JD. He may feel like he has to.