The Fed will issue its final big rate hike next month before pivoting as inflation cools, setting stocks up to rally through year-end, JPMorgan says

• The Fed September FOMC meeting will produce one more outsized interest rate hike, according to JPMorgan.
• The bank expects the Fed to raise rates by 75 basis points in September before pivoting.
• Cooling inflation data and a pivot from the Fed should continue to bode well for growth stocks, JPMorgan said.

Investors should expect one more outsized interest rate hike from the Federal Reserve next month, according to a Monday note from JPMorgan.

JPMorgan analyst Mislav Matejka said while inflation has shown signs of cooling via falling commodity prices, the Fed will still raise rates by 75 basis points at its upcoming FOMC meeting in late September.

That would market the third rate hike in a row where the Fed raised rates by 75 basis points, and it would bring the effective Fed funds rate to above 3% for the first time since early 2008, eclipsing the high of 2.5% seen in 2019.

But after September's likely interest rate hike, Matejka expects Fed chairman Jerome Powell to be more flexible in future moves, essentially leading to a pivot away from the outsized rate hikes seen over the past few months.

"Now that Fed funds rate has moved above what is traditionally seen as a neutral level, the chances are that Fed becomes more sensitive to the incoming dataflow," Matejka said.

And with home prices cooling down, gasoline prices down considerably from their recent peak, and key agricultural prices like wheat also seeing steep declines, there's a good chance the Fed will come to the conclusion that they can slow down their future rate hikes and wait to see how everything settles.

"Indeed, our economists believe inflation will move materially lower," Matejka said. JPMorgan forecasts that US CPI year-over-year inflation will fall from its recent peak of above 8% to just 3% by July 2023.

"Inflation forwards show a strong link to Brent price, and the recent softening there is welcome for inflation trends. We expect another outsized Fed hike in September, but post that we would look for the Fed not to surprise the markets on the hawkish side again," Matejka said.

Altogether, that would be good news for growth stocks relative to value stocks, and it should help the overall stock market to keep recovering from its mid-June low, Matejka said. JPMorgan expects the S&P 500 finish the year at 4,800, representing potential upside of 15% from current levels.