Markets globally will be closely keeping an eye on the US Fed’s next Federal Open Market Committee (FOMC) meeting that is scheduled for September 20-21. Markets have already priced in at least another 75 bps increase in interest rate. However, a super-sized 100 bps or full percentage point rate hike is also not off the table. Most economists expect a jumbo rate hike as the Fed has made it clear that it is focused on taming red hot inflation in the US even if it comes at the cost of economic growth leading to demand destruction.
Hotter-than-forecast consumer-inflation data recently boosted expectations for just how hawkish the Fed needs to be in order to curb price pressures. Note that the FOMC raised federal fund rates by 25 bps in March, followed by a 50 bps in May and a 75 bps hike in the June and July meetings each, taking the present policy rate to 2.25-2.5%. According to market consensus, there is nearly a 9 in 10 chance that the committee will deliver another 50-75 bps this month.
Uncertainties, tighter financial conditions creating further risk associated with rate hikes
This Fed meeting is also expected to have the economic forecast and the summary of economic projections by the US central bank. “The rate at which tightening cycle is being followed and its impact on a global scale, as well as the uncertainties, with effects of tighter financial conditions and aggregate demand, creating further risk associated with rate hikes. High inflation and interest rates affect the entire economy. Expectations of a rate hike are highly anticipated,” said Tanvi Kanchan, Head – Corporate Strategy, Anand Rathi Shares and Stock Brokers.
Fed may bring target range to 3.50-3.75% by December-end
The favourable tone of the July inflation data means the Fed is likely to raise its policy rate by 50 bps in September, as opposed to opting for another large 75bp hike, noted Ethan Harris, Head of Global Economics, BofA Global Research in a recent note. BofA continues to forecast 50 bps rate hikes in September and November, followed by a 25 bps hike in December, bringing the target range for the federal funds rate to 3.50-3.75% at December-end. It is a no-brainer that rate hikes will have consequences on the larger population and the economy as well.
Bank must continue to raise rates to stop inflation from becoming permanent: Powell
Fed Chief Powell had made it quite apparent in his Jackson Hole speech that the Fed does not currently have any plans to halt its cycle of rate increases. Powell warned of more pain for individuals and businesses because of rate hikes. “Reducing inflation is likely to require a sustained period of below-trend growth,” Powell had said then, adding that the bank must continue to raise interest rates to stop inflation from becoming a permanent aspect of the US economy. “While higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses,” he added.
25 bps rate hikes likely in both Nov, Dec meeting
Nomura’s Aichi Amemiya told CNBC-TV18 that materialising upside inflation risks will likely result in the Fed raising rates by 100 bps at the September FOMC meeting, above Nomura’s previous forecast of 75 bps. “Beyond September, we continue to expect a 50 bps hike in November, but now anticipate another 50 bps hike in December, 25 bps higher than our previous forecast. With our February 2023 expectation of a 25 bps hike unchanged, our terminal rate forecast now stands at 4.50-4.75 percent, 50 bps higher,” Amemiya was quoted saying. Meanwhile Eric Fishwick of CLSA told the channel that the tone of US Fed chair Jerome Powell’s speech suggests either a 50 bps or 75 bps move at the September FOMC meeting and then a reversion to 25 bps per meeting in November and December.