The 3Q rate hike lagging is a phenomenon in which market expectations for the US Federal Reserve's (Fed) rate hikes in the third quarter of 2023 have receded. This is a significant development, as it could have a major impact on the US economy and financial markets.
FED Funds Rate, Federal Reserve Economic Data
The Fed has raised the federal funds rate by 0.75 percentage points in the June FOMC meeting, and is expected to raise the rate by another 0.75 percentage points in the July meeting. However, market expectations have shifted to a 3Q rate hike pause due to concerns about the US economic slowdown.
Causes
There are several factors that have contributed to the 3Q rate hike lagging.
- Concerns about US economic slowdown: The US economy is slowing down due to high inflation and recession risks. The Fed is likely to be cautious about raising interest rates, which could further slow down the economy.
- Risk of recession: Recession risks are rising in the US. If a recession occurs, the Fed is likely to cut interest rates to stimulate the economy.
- Prolonged Russia-Ukraine War: The prolonged Russia-Ukraine War is causing economic uncertainty, including high inflation. The Fed is likely to take into account this uncertainty when considering interest rate hikes.
- Israel-Hamas conflict: The recent Israel-Hamas conflict has added to the geopolitical uncertainty and volatility in the global economy. This could further weigh on the US economy and delay Fed rate hikes.
- US midterm elections: The upcoming US midterm elections could also lead to political uncertainty and changes in US economic policy. This could also delay Fed rate hikes.
Impact
If the 3Q rate hike lagging materializes, it could lead to the following implications for the US economy and financial markets.
- US economy: A 3Q rate hike lagging could lead to concerns about a US economic slowdown and recession. This could lead to a decrease in consumer spending and business investment, which would further slow down the economy.
- Financial markets: A 3Q rate hike lagging could lead to volatility in financial markets. Stock markets could decline, bond yields could rise, and the US dollar could weaken.
Crypto and Equity Markets
If the 3Q rate hike lagging materializes, it could have the following implications for the crypto and equity markets.
- Crypto markets: Crypto markets are generally sensitive to interest rate hikes. If interest rates are not raised in the third quarter, concerns about inflation and recession could ease, which could lead to a rebound in crypto markets. However, it is important to note that crypto markets are also volatile and can be affected by a variety of factors, such as regulatory developments and changes in investor sentiment.
- Equity markets: Equity markets could also rebound if interest rates are not raised in the third quarter. However, other factors, such as the Russia-Ukraine War, the Israel-Hamas conflict, and the US midterm elections, could also weigh on equity markets.
Federal Reserve Economic Data