Markets See 0.75 Percentage Point Hike At November Fed Meeting

The Federal Reserve (Fed) has made a series of large rate hikes of 0.75 percentage points in its last three monetary policy meetings. They don’t meet this October. They will meet on November 1st and 2nd and announce their interest rate decision on Wednesday, November 2nd at 2pm EST accompanied by a press conference.

According to the CME’s FedWatch tool, markets currently see a 7 in 10 chance of a 0.75 percentage point rate hike and a 3 in 10 chance of a 0.50 percentage point hike.

Further tightening

The Fed has made it clear in recent weeks that it is not satisfied with current US inflation. He also does not consider the current monetary policy to be particularly restrictive.

The Fed is also keeping a close eye on unemployment and the US job market has been relatively hot so far. That’s important because so far it gives the Fed more freedom to fight inflation without worrying too much about the impact on the job market.

Current speeches

The Fed maintains a clear anti-inflationary tone in its recent speeches.

Atlanta Fed Chairman Raphael Bostic said on October 5 that the US economy “is still decidedly in the inflationary forest.”

At the Fed’s most recent meeting on Sept. 22, Chairman Powell said the following. “In the coming months we will look for compelling evidence that inflation is moving in line with inflation returning to 2%. We believe further increases in the federal funds rate target range will be appropriate.”

Fed Vice Chair Lael Brainard said on Sept. 7. “We’re in it for as long as it takes to bring inflation down. So far, we’ve been briskly raising interest rates to the peak of the previous cycle, and interest rates need to continue to rise.”

What might change

Of course, the Fed always makes it clear that monetary policy is data dependent. There are several considerations that could change the Fed’s position.

inflationary tendencies

The first is an indication that inflation is declining. We’re due a few more inflation reports before the Fed meets. So far, the Fed has mainly seen fluctuations in energy costs reduce headline inflation numbers, but underlying prices, especially food and housing, continue to rise at a worrying rate.

Unfortunately, early forecasts of upcoming inflation news are not so encouraging. However, it is still possible that the Fed will see some signs of softening in the details of these reports, or that the forecasts will turn out to be inaccurate.

The job market

Unemployment in the US is historically low. That gives the Fed some freedom to fight inflation without undue fear of the broader impact on the US economy.

However, recent data has shown that job openings in the US have declined. This indicates that the US job market is gradually starting to deteriorate. This may mean that the Fed must manage risks on both sides in order to tame inflation, but also to sustain economic growth. If the job market actually weakens, a US recession becomes a bigger risk.

Economic news is unlikely to change dramatically before the Fed’s decision in November.

The dollar

The strong dollar has helped the Fed this year. A stronger dollar dampens demand for US exports and also makes US imports cheaper. That should work in reducing US inflation, all else being equal. Should the dollar weaken after its strong run in 2022, it could require incrementally higher interest rates from the Fed.

A desire to wait and see

A point that comes up frequently in Fed speeches is that monetary policy operates with unpredictable delays. The Fed has been extremely aggressive on interest rates in 2022 and will likely continue to do so at the next two meetings.

As such, there are some voices calling for a pause in hikes to better analyze and await the impact of recent decisions. It’s just beginning. At the moment, the desire to fight inflation aggressively is winning.

Still, it will be worth monitoring in the coming months if certain policymakers are inclined to adopt a more wait-and-see stance to better gauge the economic impact of the recent large interest rate moves. The forthcoming release of minutes from this month’s Fed September meeting could provide some early clues as to whether this wait-and-see perspective is gaining traction.

What to expect

So the markets fully expect interest rates to rise again on November 2nd. The main question is by how much, with a move of 0.75 percentage point seen as the most likely. The question then is how the Fed views interest rates at the December meeting and into 2023.

Markets are currently suspecting that the Fed will start easing rate hikes in 2023. However, if inflation continues to heat up and the US economy appears relatively resilient, that expectation could change. On the other hand, if a full recession looms and inflation eases, even rate cuts in 2023 are possible.

Also Read :  Markets turn cautious ahead of key US data

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