But September is much less clear cut
However, there is a debate as to what happens thereafter. Some officials want the Fed to continue with 50bp hikes to ensure inflation is brought under control, but this risks moving policy deeply into restrictive territory and heightening the chances of a recession. Others argue that there is already evidence of the growth outlook weakening and inflation pressures tentatively softening, which could justify a pause in September.
Consequently, we will be keeping a close eye on the Fed’s updated forecasts and their “dot plot” diagram, which neatly illustrates the dispersion of views around the central tendency forecast for the mid-point of the target range. In March, this was for the Fed funds rate to end the year at 1.9% before reaching 2.8% for end-2023 and end-2024. It was then expected to drop back to 2.4% over the longer run.
Despite some talk of a pause (most notably from Raphael Bostic of the Atlanta Fed) we feel the growth, jobs and inflation backdrop will keep the hawks in the ascendency, though at the same time, the conviction of ongoing 50bp is not strong. Housing numbers are softening, the wage figures have not been as inflationary as many thought and the strong dollar and higher longer-dated Treasury yields are also helping to tighten financial conditions.
The end-2022 Fed funds prediction will inevitably rise given the Fed’s more hawkish shift since March – remember back then the Russian invasion of Ukraine had led them to tread cautiously with a 25bp initial rate hike. We expect the central projection to rise to a minimum of 2.6% given the market is already pricing 2.75-3%. We strongly suspect the end-2023 number will get up to 3%, and the long run may be raised marginally to 2.5%.
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