Federal Reserve: What Are the Expectations for a December Rate Hike? – BNY

Markets are pricing in a Fed funds rate peak just above 4.5% and around three further hikes by next year, but BNY Markets’ John Velis questions whether the full 100bp of expected tightening will materialise. Looking ahead to the October FOMC, he anticipates no rate increase this week, with a possible move in December. His assessment also focuses on potential hawkish dissents and the Fed’s credibility.

What Could FOMC Dissents Mean for the Rate Path and Fed Credibility?

"In line with the market, we don’t foresee a rate hike at the October FOMC tomorrow and prefer to place our expectations for further tightening on the December meeting. Based on Fed commentary and a steady, if sticky, inflation outlook, we don’t think the weight of the Committee will fall on the hawkish side."

"Rates aren’t expected to rise at a steady, meeting-by-meeting pace and are actually expected to top out at just above 4.5%, indicating around three more hikes by this time next year."

"That said, we do expect at least one dissent, if not more, in favor of raising rates. If we’re right, and there is an objection (or two), we would expect the market to interpret Wednesday’s decision hawkishly, solidifying the expectation of a hike at the end of the year."

"At the press conference, we don’t see any preview of what we expect to be a December hike, given Chair Kevin Warsh’s disinclination to provide guidance on future policy moves. Nevertheless, we think that market expectations for a December hike will be solidified."

"Yet we’re not convinced the Fed can deliver the 100bp that’s been priced in since the beginning of the tightening cycle, and we’re not sure it would be needed if inflation doesn’t broaden out to cyclical items."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)