JPMorgan's Predictions on Federal Reserve Interest Rate Adjustments

For this monetary policy meeting, JPMorgan suggests considering the following five scenarios, along with corresponding estimates for the S&P 500’s fluctuations.

First, the Federal Reserve does not raise interest rates.

If the market believes that the Federal Reserve is not doing enough to control inflation, inflation expectations may continue to rise, leading investors holding long-term U.S. Treasuries to demand higher yields. Once long-term interest rates rise, stock valuations will be suppressed. In this case, the S&P 500 is expected to decline by 1.25% to 1.75%.

Second, raising rates by 25 basis points, but not indicating how much more will follow.

If this rate hike has already been priced in by the market, while also giving investors more confidence in controlling inflation, the upward pressure on long-term U.S. Treasury yields may ease, offering U.S. stocks a chance to rebound. The corresponding estimate for the S&P 500's increase is 0.25% to 0.75%.

Third, raising rates by 25 basis points while hinting at a faster reversal of cuts by 2025.

For example, moving the subsequent rate hikes from December and March of the following year to October and December. Although the rate hike comes sooner, if the market recognizes this approach as effective in handling inflation and believes that taking action earlier can reduce future pressures, U.S. stocks might also rise. The corresponding estimate for the S&P 500's increase is 0.5% to 1%.

Fourth, raising rates by 25 basis points, but the market begins to question whether the current rates are still too low.

This involves the assessment of neutral rates. If the rates required to maintain economic and price stability are higher than in the past, then a 25 basis point increase may be far from sufficient. Investors will begin to worry that the cumulative rate hikes could reach 100 basis points or more, and it might even be possible to raise by 50 basis points at some meetings. The corresponding estimate for the S&P 500's decline is 0.25% to 1%.

Fifth, raising rates by 25 basis points while emphasizing that rates need to be significantly increased to fully suppress inflation.

This type of statement might worry the market about experiencing a rate hike cycle similar to that of 2022 to 2023. Corporate financing, household borrowing, and stock valuations will face greater pressure, with the S&P 500 expected to decline by 1% to 2%.

The above content is sourced from JPMorgan

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