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With the Federal Open Market Committee (FOMC) meeting approaching, the market is waiting to see if the Fed will halt further interest rate increases. Back in May, the Federal Reserve increased the interest rate for the 10th consecutive time by 25 bps to between 5% to 5.25%.
|FOMC Meeting Date||Rate Change (bps)||Federal Funds Rate|
|May 3, 2023||+25||5.00% to 5.25%|
|March 2, 2023||+25||4.75% to 5.00%|
|February 1, 2023||+25||4.50% to 4.75%|
|December 14, 2022||+50||4.25% to 4.50%|
|November 2, 2022||+75||3.75% to 4.00%|
|September 21, 2022||+75||3.00% to 3.25%|
|July 27, 2022||+75||2.25% to 2.50%|
|June 16, 2022||+75||1.50% to 1.75%|
|May 5, 2022||+50||0.75 to 1.00%|
|March 17, 2022||+25||0.25% to 0.50%|
The last increase in May marked the interest rate reaching its 16-year high after the Fed kept the interest rate close to zero during COVID-19.
Experts believe that the Federal Reserve is unlikely to raise rates again in June after the FOMC meeting. “The absence of any such preparation [for a raise] is the signal and gives us additional confidence that the Fed is not going to hike in June absent a very big surprise in the remaining data, though we should expect a hawkish pause,” Evercore ISI strategists said in a May 19 note. With the risk of the U.S. defaulting out of the way too, the Fed can focus only on the financial conditions of the market.
Current Financial Situation Ahead of The FOMC Meeting
The US economy gained 339,000 jobs in May, while this is a 7% decrease from May 2022, it also represents a 36% increase over the 249,000 jobs gained in April, which can be considered important since job growth has been declining in the U.S since August 2022.
Furthermore, the 12-month percentage change in Consumer Price Index (CPI) and Producer Price Index (PPI) is continuing to decline after they reached their 40-year high back in June 2022. If the Fed let the CPI and PPI decline at the same rate, the US could see itself entering a recession.
While the CPI change is still high at a 4.9% YoY increase in April, it still provides room to pause the hike in interest rates as the Fed monitors the situation before the next FOMC meeting in July.
Following the consensus that the Fed will pause interest hikes in June in the FOMC meeting, different sectors will have different reactions to the news. Real estate will be one of the most impacted sectors since mortgage rates have been climbing with the interest rate hike and reached their 20-year high in October 2022.
The high mortgage rates were a turn-off for new home buyers, which made existing home sales in the U.S. decline to levels not seen since 2008 in December 2022. That resulted in one of the largest retail home lenders, Rocket Companies, Inc. (NYSE: RKT), resorting to introducing its risky 1% down home loan program to incentivize low- and middle-income Americans to become homeowners. If the Fed decided to pause the hikes, the real estate market could stabilize which would increase demand for homes.
Banking & Fintech
The banking sector is another sector that would benefit from the pause after multiple banks like Silicon Valley Bank (SVB) and First Republic Bank (FRC) failed earlier this year. The failures can be traced to these banks not being prepared for interest rate changes and the overall economic situation in the US.
With the pause, the risk of midsize and regional banks being stressed by deposit withdrawals decreases, which will prevent more banks from sharing the same fate as SVB and FRC. Furthermore, it can help banks like PacWest Bancorp (NASDAQ: PACW) recover since more people would be willing to take loans.
On the fintech front, the pause can see good performers performing even better since SoFi Technologies, Inc. (NASDAQ: SOFI) has increased its deposit inflow by 38% to over $10 billion. Following a pause, SoFi can expect demand for its loans to increase after it obtains a bank charter in January 2022.
Affirm Holdings, Inc. (NASDAQ: AFRM) is another example of a fintech company that could benefit from improving macroeconomics since more people would be willing to buy more and Affirm can provide them a way to do it with its buy now pay later (BNPL).
A pause in interest rate hikes will benefit the market as a whole since it can help the market maintain the sentiment that has been going on recently despite the rate hikes.
If the Fed decided to pause the rate hikes in June in the FOMC meeting, it wouldn’t necessarily mean that there will be no hikes in the future, but it indicates that the cycle of rate hikes is nearing its end. That would also mean that the U.S. is close to reaching macroeconomic stability. While macroeconomic stability would benefit the whole market, sectors like real estate and the banking sector would see more benefits since they’re directly impacted by interest rates.
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