The US Federal Reserve (Fed) will hold a policy meeting from September 20th to 21st, and is scheduled to announce the results of its interest rate decision in the early morning of the 22nd, Taipei time. The market will focus on four major focuses: the rate hike in September and the prospect of a rate hike in November , a dot-plot of the future path of interest rates, and economic forecasts that will reveal what Fed Chairman Powell has previously described as “pain.”
This week’s 3 yards rise is the most popular
Wall Street expects the Federal Reserve to raise interest rates by another 3 yards, raising the federal funds rate to a range of 3.0%-3.25%, the third sharp hike in a row.
Traders forecast a more than 80 percent chance of a three-point rate hike this week and an 18 percent chance of a four-point rate hike, according to the CME’s FedWatch tool.
Many analysts believe the odds of a 4-yard rate are remote, with BMO Financial Group chief economist Michael Gregory explaining that an unprecedented 4-yard rate hike could convey a sense of policy panic.
Carlyle Group co-founder David Rubenstein also believes that the Fed has been sending the market a message of a 3-yard hike, so a 4-yard rate hike is unlikely to spook the market.
However, Nomura Securities cross-asset strategist Charlie McElligott issued a research report on Tuesday warning that the market has seriously underestimated the risk of the Fed raising interest rates by 4 yards. .
Prospects for a rate hike in November
Federal Reserve Chairman Powell will hold a press conference at 2:30 p.m. ET on the 21st. Wall Street expects that Powell may stress that the Fed will make every effort to fight inflation and is unlikely to reverse its policy stance in the short term. Also hinted at opening the door for a fourth 3-yard gain in November.
Roberto Perli, global policy director at Piper Sandler, predicts that Powell will be tough again at the press conference, and that any dovish rhetoric is likely to be the result of miscommunication by the Fed.
Fed Governor Michelle Bowman said recently: “A rate hike of a similar magnitude should be proposed until we see inflation falling in a consistent, meaningful and durable manner.”
“If FOMC officials generally hold this ‘similar scale’ view, which equates to a 3-yard rate hike, then this shouldn’t be the last 3-yard rate hike,” said Tim Duy, U.S. economist at SGH Macro Advisor.
The end-point rate forecast for this cycle of rate hikes
The Federal Reserve raised the federal funds rate by 3 yards on July 27 to a range of 2.25%-2.5%, while economists have been raising the U.S. consumer price index (CPI) in August after unexpectedly exceeding expectations in the past week. Expectations of the federal funds rate target.
The market is now pricing in a 4.5% endpoint rate for April next year, up from around 4% before the consumer price index (CPI) was released last Tuesday.
In fact, as early as June, there were indications in the interest rate dot chart that Fed officials have not ruled out that the terminal interest rate exceeds 4% and moves in the direction of 5%. In the dot plot of the Fed in December last year and March this year, the endpoint rate was only 4%, but the upper limit of the interest rate dot plot in June was 5%.
Economists at Goldman Sachs expect the median Fed forecast to see the federal funds rate at 4% to 4.25% by year-end, with another hike to 4.25% to 4.5% in 2023, followed by cuts in 2024 and again in 2025.
Meanwhile, the interest rate dot plot is expected to show a longer path for interest rates, while also showing that the Fed has no intention of cutting rates next year.
“What the Fed is trying to do is find a viable way to rein in the economy without leading to a full-blown recession,” said Seth Carpenter, global chief economist at Morgan Stanley.
Economic forecasts will reveal what Powell previously described as ‘pain’
Ball pointed out at the Jackson Hole annual meeting on August 26 that the Fed’s policy to curb high inflation will cause “pain” for American households and businesses. Economic forecasts released this week will reveal what Powell described as “painful,” with analysts predicting the Fed will raise its unemployment and inflation forecasts.
The Fed forecast in June that the unemployment rate would be 3.7% this year, unchanged from the August nonfarm payrolls report. Officials also expect the unemployment rate to rise to 3.9% in 2023 and 4.1% in 2024. Over the next three years, U.S. gross domestic product (GDP) growth is forecast to grow at just under 2 percent.
Diane Swonk, chief economist at KPMG, expects the pain to unfold by the end of next year, when the unemployment rate jumps above 5%.
Priya Misra, head of global rates strategy at TD Securities, expects the Fed to offer a cautiously optimistic outlook on the economy, the labor market and inflation to provide evidence that the Fed is willing to take some economic pain to reduce extreme economic pain. high inflation.
Misra also believes that the Fed will raise inflation expectations, predicting whether the Fed will restore core consumer price index expectations to the 2% target within the 2025 forecast range.
Jim Caron, head of global fixed income macro strategy at Morgan Stanley Investment Management, said: “The Fed has to raise unemployment to really contain inflation, and the process of raising rates would increase the risk of a recession while reducing the risk of inflation, because It’s all about lowering demand at the cost of slower growth going forward.”