US | Has the fed funds rate finally peaked?

Summary

We expect the FOMC to hold the fed funds rate steady at its 5.25-5.50% target range, but also to keep its doors open for an additional rate hike in December, as signaled by the 5.6% median peak rate projection revealed in the September SEP.

Key points

• Key points:
• The decision to extend last meeting’s pause will likely come from a prevailing opinion to proceed cautiously amid mixed data releases and an uncertain outlook.
• Besides, soaring long-term rates seem to have joined the Fed in its fight against inflation, probably offsetting some of the previously planned additional policy firming.
• The recent spike in the 10-year Treasury yield seems to stem from a higher real rate and an increased term premium, rather than from higher inflation expectations.
• Chair Powell and some other FOMC voting members paved the way for this week’s likely pause, but warned that higher policy rates are still possible.
• We expect the Fed to convey the message that if long-term rates remain elevated on higher term premia, there could be no need to raise the fed funds rate further.

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