Federal Reserve Meeting Shock: Two More Rate Hikes Eyed; S&P 500 Hangs Tough

The Federal Reserve skipped a rate hike but signaled that its key interest rate will likely rise in July and again after that. Policymakers expect to end the one-meeting reprieve amid continued strength in the job market, some easing of the bank crisis and a new bull market for the S&P 500.

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New quarterly projections released with the Fed meeting statement indicate that policy committee members are united about the need for one additional hike. The committee as a whole also is leaning strongly toward one further hike after July’s Fed meeting.

After release of the Fed policy statement and projections, the S&P 500 moved initially moved lower but largely erased its losses.

“Nearly all” Fed committee members expect that “some further rate increases will be appropriate this year,” Federal Reserve chair Jerome Powell said in beginning his 2:30 p.m. ET news conference.

The risks to inflation are still to the upside, he said. “You’re not seeing a lot of progress” in core inflation coming down.

While no decision has been made about a hike on July 26, Powell said, “I do expect that it will be a live meeting,” meaning a hike will be in play.

Federal Reserve Rate Projections

Now a solid majority, 16 of 18 Fed policymakers, anticipates one more rate hike to a range of 5.25% to 5.5%. That’s up from seven of 18 in March.

The projections show 12 of 18 Fed committee members expect at least two quarter-point moves to a range of 5.5% to 5.75%. In March, only four members saw rates getting that high.

Ahead of the Fed releases at 2 p.m., markets were pricing in 58.5% odds of a quarter-point hike on July 26. Shortly after 2 p.m., that jumped to 71%. However, markets see just 18% odds of a further quarter-point hike in September.

In other words, markets aren’t buying Fed guidance. The implication is that either the Fed has it wrong or is bluffing, perhaps hoping to keep a lid on the S&P 500.

Indeed, the Fed may have it wrong. Despite the “robust” job gains the Fed noted, other labor market metrics, such as hours worked, have painted a much softer picture.

Fed policymakers are now forecasting 1% GDP growth this year, up from the 0.4% growth expected in March.

S&P 500 Reaction

After the Fed statement and projections, the S&P 500 initially fell around 0.7%, but cut the loss to just 0.1% in Wednesday afternoon stock market action. Meanwhile, the Nasdaq composite turned slightly positive.