Another jumbo Fed rate hike is expected next week — and then life gets tough for Powell

First the easy part.

Economists widely expect the Federal Reserve to approve a fourth straight jumbo interest rate hike at its meeting next week. A three-quarter rate hike would bring the central bank’s benchmark rate to 3.75-4%.

“The November decision is a lock. “If they don’t go above 75 basis points, I’m going to be pissed off,” said Jonathan Pingle, chief U.S. economist at UBS.

The Fed’s decision will be made at 14:00 on Wednesday after two days of talks between members of the Federal Open Market Committee.

Fed Chairman Jerome Powell’s press conference half an hour later will be fuller.

Attention will be focused on whether Powell sends a signal to the market about plans for a smaller increase in the benchmark interest rate in December.

The Fed’s “point plan” forecast for interest rates released in September has already slowed to a half-point rate hike in December, followed by a quarter-point hike in early 2023.

The market is waiting for signals about a change in policy, and many believe that Powell will use the press conference to signal that a slower pace of rate hikes is indeed coming.

Last week, the Wall Street Journal reported that some Fed officials were reluctant to keep interest rates at 75 basis points per meeting. That, along with San Francisco Fed President Mary Daly’s comment that the Fed should start talking about slowing growth, was seen by stock and bond markets as a sign of a slowdown to come.

“Nobody wants to be late to the party, so the tip was enough,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Luke Tilley, chief economist at Wilmington Trust, said he thought Powell would point to a smaller rate hike in December, focusing on some good wage inflation news released Friday.

Tilley said there has been a clear slowdown in private sector wage growth.

To see: U.S. wage pressures eased slightly from highs in the third quarter

UBS’s Pingle said the problem with Powell’s indication that he has found an exit ramp from jumbo rate hikes this year is that committee members aren’t ready to signal a rate hike. He argued that big inflation data in September would not give Fed officials any confidence that a cooling in price pressures is imminent.

To see: US inflation remains warm, the core PCE price gauge shows

Another concern for Powell is the lack of cooperation from future data.

There are two employment reports and two consumer price inflation reports ahead of the Fed’s next policy meeting on December 13-14.

So Powell may have to reverse course.

“If you pre-commit and the data hits you in the head, then you can’t go ahead,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.

This has been the Fed’s pattern all year, Stanley noted. As recently as March, the Fed thought its terminal interest rate, or peak benchmark rate, would not rise above 3%.

While the Fed wants to slow the pace of rate hikes, it doesn’t want the market to take a cut in the size of rate hikes as a signal that a rate cut is imminent. But some analysts believe that the first cut will actually happen after the Fed reduces the rate hike.

In general, the Fed wants monetary conditions to remain restrictive in order to squeeze life out of inflation.

Pingle said he expects Kansas City Fed President Esther George to formally object in favor of a slower rate hike.

There is growing disagreement among economists about the “peak” or “extremity” of this hiking period. The Fed set the discount rate in the range of 4.5%-4.75%. Some economists think the final rate could be lower than that. Others think interest rates will be above 5%.

Those who think the Fed will stay short of 5% tend to talk of a recession as the fast pace of Fed hikes “breaking something.” Those who see interest rates above 5% think inflation will be more sustainable.

Ultimately, Amherst Pierpont’s Stanley believes data won’t be the deciding factor. “The answer to the question of what forced or enabled the Fed to stop probably won’t come from the data. The answer will be that the Fed has a range to pause.”

The Fed is “focusing on this point of truth where we have very tight labor markets and very high inflation, and the Fed is going to come out and say, ‘OK, we’re ready to take a break here.’ “

“It strikes me that it’s going to be a very volatile period for the market,” he said.

Fed fund futures markets are already volatile, with traders penciling in a terminal rate above 5% two weeks ago and now seeing a terminal rate of 4.85%.

During October, the yield on the 10-year Treasury Note TMUBMUSD10Y,
it rose above 4.2% before softening to 4% in recent days.

“When you get to the end, every move is really important,” Stanley said.

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