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Earlier this month, the Fed delivered the fourth consecutive 75bp hike, taking the fed funds rate to 3.25-4.00%. Last week’s positive surprise on inflation tilted the balance significantly towards an upcoming slower rate-hike pace, but 100bp worth of additional hikes still seem likely.
However, it also laid the ground for a slower pace of hikes as soon as the Dec or Feb meeting; talk about pausing is “very premature.”
We think that clear signs of a possible smaller hike in December are still unlikely, not only because it will depend on upcoming data, but also considering that a wide consensus within the FOMC on the next steps seems still unlikely.
Rates are now pricing in that the Fed will not stop until data shows clear signs of easing inflation and a more balanced labor market. Another fourth 75 bp rate increase in Nov is locked in, while the odds of a fifth in Dec will continue to inc…
The updated “dot plot” reinforces the Fed’s “higher rates for longer” approach to bring inflation down to 2%. Another 75bp hike is now more likely than not in November and rates will likely go higher than previously thought.
The Summary of Economic Projections (SEP) will point to less confidence in the soft-landing outcome and a challenging road to bring back inflation to below 3.0% levels as the Fed “keeps at it until the job is done”.
Persistent core inflation coupled with a resilient economy give the Fed “flexibility to be aggressive” against inflation. Another supersized rate increase (75 bps) is coming next week: the Fed will continue to front load rate hikes to add 150bp of tightening by December before shifting to a relatively long pause thereafter.
Signs that inflation is stabilizing and rising recession risks add to the market view that the policy stance could reverse sooner. More hikes are coming, as the Fed is still looking to take rates to a moderately restrictive level to bring infla…
Bringing inflation down to 2% remains the top priority: the risk of doing too little outweighs that of doing too much, so the focus on inflation will remain in the foreseeable future.
The Fed will take the policy rate to its longer-run neutral level. Although the pathway to achieve a soft landing has evolved from “likely” to “plausible”, the tightening cycle still has legs.
Flatter yield curve on rate hike-frontloading and increased growth outlook concerns; are markets about to price in a hard landing as inflation does not (yet) give in to Fed action?
Since the decade of the 1970s a strong surge in US inflation had not been seen. Even though there are some similarities between those years and nowadays like the higher inflation of food and energy, the Fed back then was not truly independent and used to favor employment expansion at the expense of inflation.
