FOMC Meeting: Fed likely to hike interest rates by 25 bps – but recession fears persist

YEREVAN (CoinChapter.com) – The Federal Open Market Committee (FOMC) is expected to agree upon a 25 bps interest rate hike during the meeting on Feb 1 instead of a 50 bps hike. That would be a further slowdown compared to the previous year. Moreover, the stock market could look at a relief rally but not dodge recession fears completely, at least in Q1, experts say.

FOMC meeting to slow quantitative tightening (QT)

In detail, the US lawmakers kept their anti-inflation policies in high gear in 2022, delivering three consecutive interest rate hikes, three-quarters of a basis point each. However, curbing inflation could allow for a more dovish approach.

Additionally, data released earlier this month showed that both consumer and wholesale prices fell on a monthly basis in December. Patrick Harker, the chief of Philadelphia’s Federal Reserve Bank, agreed with the possibility of a 25 bps hike. He commented that while the Fed needs to raise rates more to cool off inflation, it can probably do so at a much slower pace compared to the action of last year.

I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.

said the expert.

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Notably, the Fed penciled in a stopping point of 5.1% for 2023 at the last FOMC meeting. According to the latest CPI report released on Jan 13, core inflation stood at 6.5%, giving the Fed a chance to ease on the QT policies.

Too early for Stock market bulls

US stocks fell on Jan 30, with investors growing cautious at the start of a “bumper week” of central-bank meetings and corporate earnings. As per Wall Street Journal, the S&P 500 was down over 52 points, or 1.3%, and fell to 4017. Meanwhile, the Dow Jones Industrial Average fell 260 points, or 0.8%, to 33717. The Nasdaq Composite declined nearly 228 points, or 2%, to 11393.

However, the expectations of a more dovish approach agitated the markets. S&P500 pared yesterday’s losses, returning to 4046 on Jan 31. Notably, the index also broke a persistent resistance in the process and retested it as support.

Is recession still incoming?

While the FOMC meeting on Feb 1 could bring good news, traders should not take the uptick for a convincing recovery rally just yet. The troubling macro factors that partially caused the market turmoil in 2022 still persist. Thus, while the geopolitical balance is not restored, and the energy crisis persists, it is not likely that the stock market can make a full recovery.

For the time being, stocks might offer some returns but not safety, as experts have been ringing recession bells since 2022. According to estimations from the World Economic Forum, investors believe there’s a 48% chance for a recession in 2023, significantly higher than for next year.

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Gregory Daco, the chief economist at Ernst and Young’s EY-Parthenon consulting group, agreed.

So we have not seen the type of severe pullback we usually see at the onset of a recession, where businesses look to cut costs rapidly. The pullback is likely to be softer and more gradual than in the past. We’re not going to see broad-based layoffs.

admitted the expert.

However, he also noted that “there are more indications that the economy is slowing down materially.” “That’s typically the sign of the onset of a recession,” added Daco.

Michael Antonelli, a managing director and private wealth manager at the financial services company Baird was also skeptical. He said that to get a “soft landing,” inflation would have to fall significantly, corporate earnings would have to hold up, and the job market would have to stay strong.

“The odds of sticking that ‘landing’ is going to be tough — but not impossible,” commented Antonelli.

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