As the Federal Reserve approaches its latest decision-making event next Wednesday, June 14th, the financial world is teeming with speculation. The ten consecutive rate hikes, which include four significant jumps of 75 basis points (bps), two of 50 bps, and four of 25 bps, have left investors and analysts wondering: could this be the end of the current hiking cycle or merely a pause?
The market currently predicts a one-third chance of a further 25 bps hike versus a two-thirds opportunity for a pause. Interestingly, such high market pricing for a pause suggests the Federal Open Market Committee (FOMC) is planning to hold steady. Despite the Fed’s current communication blackout in anticipation of next week’s meeting, should the market be misaligned with its intentions, Jerome Powell, the Fed Chair, has the means to provide a timely nudge via his contacts in the media.
The FOMC has embarked on a historically long rate hiking streak, ten consecutive meetings, leading into next week’s conference. The chart below shows that this is only the fourth occurrence of three or more successive hikes since 1994. The longest streak of hikes consisted of 17 consecutive meetings in the early 2000s, a sequence that ended with the Great Financial Crisis. On two other occasions, the Fed increased rates for three straight sessions and then paused. This history underscores the current streak of ten rate hikes in consecutive meetings is quite rare.
To offer further perspective, the chart below illustrates the historical level of the Fed Funds rate dating back to 1994. It reflects the range’s upper bound since the Fed switched from setting a single interest rate to a range. Currently, we are in the fourth tightening cycle since 1994. However, during the 2015-2018 tightening phase, the Fed adopted a more cautious approach, abstaining from hiking rates at consecutive meetings.
Several Fed officials have emphasized that any pause in rate hikes next week should not be interpreted as the conclusion of this rate tightening cycle. Intriguingly, in two out of the three periods when the Fed paused during consecutive hikes, the subsequent move was a rate cut. The exception to this pattern was in 1994, when the FOMC paused before resuming with three more hikes over the next five meetings. However, interest rates were at a lower level then as well.
As the U.S. financial community braces for the forthcoming announcement, the critical question remains: is this the end of the tightening cycle, or simply a temporary pause? Only time will provide the definitive answer.
Finally, we’d be remiss if we didn’t mention that the S&P 500 officially ended the bear market that started on 1/3/22 with Thursday’s close. The bear market low was reached on October 12th last year, with the S&P 500 down -25% and, as of Thursday, was up +20% from that date, marking a new bull market.
Economy
- U.S. equity markets were relatively flat for the week ending June 9th, with the S&P 500 up +0.4%, the Nasdaq up +0.1%, and the small-cap Russell 2000 up +1.9%. It was a quiet week, with little in the way of market-moving news. But next week will be action-packed with CPI and the Fed’s rate decision.
- The ISM Services PMI fell to 50.3 in May from 51.9 in April, pointing to the fifth consecutive month of expansion in the services sector but the slowest in the current sequence. Figures came below forecasts of 52.2 amid a slowdown in business activity (51.5 vs. 52), new orders (52.9 vs. 56.1), and new export orders (59 vs. 60.9) while employment contracted (49.2 vs. 50.8).
- New orders for manufactured goods in the U.S. increased by +0.4% from the previous month in April amid solid defense spending, but slowing from the downwardly revised +0.6% increase in the prior month and missing market forecasts of a +0.8% jump.
- The number of Americans filing for unemployment benefits jumped to 261K in the week ended June 3rd, which included the Memorial Day holiday, the highest figure since October 2021, and above market forecasts of 235K.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Utilities were the top performers, while Consumer Staples and Technology lagged. Value stocks led growth stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 5 basis points to 3.75% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by government bonds and corporate bonds.
