Expectations are the FOMC will announce a 75bp rate increase in the federal funds rate at the meeting this week.
Communicating that the discussion took place should be enough to open the door for a step down to a 50bp rate hike in December, as we currently expect. That said, we expect Chair Powell to say that no decision was taken and the committee remains data dependent. With two employment reports and one CPI report between the November FOMC meeting and the December blackout period, the Fed will be reluctant to pre- commit to a smaller rate hike this far in advance. Data still need to cooperate.
By reaffirming the September median policy rate path, repeating consensus FOMC views that risks to the outlook for inflation still reside to the upside, and emphasizing a willingness to err on the side of tightening to much over tightening too little, we think the Fed can be successful in pushing back against any interpretation that a slower pace of rate hikes implies a lower terminal rate or a quicker pivot to rate cuts. In other words, it is now about the destination, not the journey.”From Goldman Sachs: “The FOMC is set to deliver a fourth 75bp hike at its November meeting next week, raising the target range for the fed funds rate to 3.75-4%. The focus will be on what comes next, and we expect Chair Powell to hint that the FOMC will likely slow the pace to 50bp in December … We expect the FOMC to eventually pair that slowdown to 50bp in December with a somewhat higher projected peak funds rate in the December dot plot. We are adding another 25bp hike to our own forecast—which now calls for hikes of 75bp in November, 50bp in December, 25bp in February, and 25bp in March—and now see the funds rate peaking at 4.75-5%.”
Current Wall Street forecasts are for GDP to increase slightly in 2022 Q4 over Q4 in line with FOMC projections. For example, BofA is projecting:We now forecast GDP growth to slow to 0.2% in 2022 (4Q/4Q) and expect growth to slow to -0.9% in 2023 (4Q/4Q) as the lagged effects of tighter monetary policy and financial conditions cool the economy.
The unemployment rate was at 3.5% in September. So far, the economic slowdown has not pushed up the unemployment rate.
As of September 2022, PCE inflation was up 6.2% from September 2021. This was below the cycle high of 7.0% YoY in June. There was a surge of inflation in Q4 2021, so with less inflation in Q4 this year, it is possible inflation will decline to the projected year-over-year range in Q4.
PCE core inflation was up 5.1% in September year-over-year. This was below the cycle high of 5.4% YoY in February. Core inflation has picked up more than expected and will likely be above the Q4 projected range.
Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1 Projection Date202220232024Sept 20224.4 to 4.63.0 to 3.42.2 to 2.5June 20224.2 to 4.52.5 to 3.22.1 to 2.5