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According to fed futures data, there is a nearly 99% chance that the Fed will hike rates by 25 bps on July 26.

The Federal Open Market Committee (FOMC) will announce its next interest rate move on Wednesday, following a brief break in June. Based on Fed Funds futures contracts, the Federal Reserve (Fed) is nearly guaranteed to raise interest rates by 25 basis points (bps) today.
 

July Rate Hike is Almost Guaranteed

Following a short pause in June, the Federal Reserve will almost certainly deliver a new 25 bps interest rate increase on Wednesday and return to its rate-hiking campaign to raise borrowing costs and bring down inflation. In specific terms, there is a 98.9% likelihood that the US central bank will jack up rates once again at the July 26 meeting, according to the CME FedWatch tool.

Developed by the Chicago Mercantile Exchange (CME), the FedWatch is a financial market tool that allows investors and traders to monitor the market’s expectations of future interest rate changes by the Fed. The tool calculates the probabilities of interest rate hikes or cuts based on the pricing of Fed Funds futures contracts, providing valuable insights into the market sentiment regarding monetary policy.

While some investors expect this to be the final rate hike in the Fed’s tightening cycle, other market participants are not as convinced. The main reason for this is the significant resilience of the US economy, which could eventually rekindle inflation. For instance, the country’s labor market remains surprisingly strong, with demand for new workers continuously outstripping the number of available jobs.
 

Inflation Down by 6% in a Year After Fed’s Series of Rate Increases

If the Fed raises interest rates on Wednesday, as is widely expected, it will mark the central bank’s 10th consecutive increase since May 2022, excluding the last month’s pause. A new 25 bps hike would raise the federal funds rate to a 5.25% – 5.5% target range, further limiting economic activity as the borrowing costs for homes, cars, and other items edge higher.

The Fed’s belligerent rate-hiking campaign has successfully tamed inflation from the 40-year-high of a 9.1% peak observed in June 2022 to 3% in June 2023. Although this represents a noteworthy drop, the annual inflation rate remains higher than the Fed’s desired target of 2%.

Now, economists are debating whether further rate increases are needed to ensure “disinflation” continues or if doing so could cause unnecessary damage to the US economy. Therefore, despite the broad expectations, it remains to be seen whether the Wednesday move will be the Fed’s last hike for 2023.

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