Wall Street Is Betting the Fed Is Done With Rate Hikes

Few expect the Federal Reserve to continue raising interest rates this year after the central bank lifted its benchmark rate to a 22-year high last week.

On Monday, the probability of no hike in September stood at nearly 80%, according to the CME FedWatch Tool. It was nearly 67% for November and 62% for December.

The FedWatch Tool, whose data is based on 30-Day Fed Funds futures, is a closely watched indicator of possible moves by the central bank. It's based on data that shows where traders are putting their money.

"Inflation is heading in the right direction, giving the Fed some leeway as they consider what to do at their next meeting," said Jeffrey Roach, chief economist for LPL Financial in Charlotte, N.C., in a client note on Monday.

His team believes the Fed has raised interest rates for the last time this year and for the months that follow.

Last week, in announcing the 11th rate hike since March 2022, Fed Chair Jerome Powell was circumspect on whether additional increases are likely.

"I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted," he said during a press conference. "And I would also say it's possible that we would choose to hold steady at that meeting."

The central bank makes its decisions based on data, Powell reiterated, so what happens next depends on the myriad indicators that measure such indicators as inflation, economic growth and the strength of the labor market.

The next key piece of economic data comes out Friday: the July employment report from the Bureau of Labor Statistics. Economists polled by FactSet expect it to show that the nation added 200,000 jobs in July, down from 209,000 jobs in June, as the unemployment rate remained at 3.6%

A softening labor market is a sign that inflation will continue to cool.

Meantime, the good news is that the Fed's favorite inflation gauge, the personal expenditures consumption price index, or PCE, rose only 3% in June over the previous 12 months, down from a 3.8% year-over-year increase in May.

The Fed's goal is to bring inflation down to 2%, but rate hikes take time to move the needle. The market is largely betting that policymakers have done enough.

Still, while showing signs of cooling, the labor market has proven resilient. Economic growth has come in much stronger than expected, and consumer confidence remains high.

"Stronger growth could lead over time to higher inflation," Powell said last week, "and that would require an appropriate response for monetary policy. So we'll be watching that carefully and seeing how it evolves over time."