Federal Reserve policymakers are meeting on Tuesday and Wednesday (May 2-3) to review their progress in bringing down inflation from its 40-year high, with markets betting that the Federal Open Market Committee (EOMC) will continue to raise interest rates by 25 basis points and then pause in June.
The markets have widely priced in another rate hike from the Federal Reserve at its May meeting, bringing the target range for the federal funds rate to 5.0%-5.25%. However, some traders believe the rate will remain unchanged at the current range of 4.75%-5.0%.
The markets, according to Morgan Stanley and Goldman Sachs, are awaiting not only the rate policy decision, but also the message that will be delivered by the FOMC at the meeting, which could end up resulting in a repricing of bond market expectations for rate direction in the second half of 2023.
Morgan Stanley noted that should the message signaled a rate cut, it could lead to a negative surprise for equities “particularly given the upside in index price that was seen in the FOMC and the fact that this meeting is one of the least talked about in recent memory.”
Goldman Sachs, meanwhile, estimates the Committee will signal that it anticipates pausing in June, but retains a hawkish stance, halting earlier than it previously envisioned due to bank stress leading to a tightening of credit.
The Fed is scheduled to announce its rate decision later in the day.
