December hike expectations: BNY on the Federal Reserve

The Fed funds rate is priced to peak just above 4.5%. Previewing the October FOMC, BNY Markets’ John Velis expects rates to remain unchanged this week, with a possible hike in December. Market-implied probabilities point to around three further hikes by next year, he notes. His focus is on potential hawkish dissents and Fed credibility, alongside doubts over whether the full 100bp of tightening priced in by markets will materialise.

FOMC outlook: rate path, dissent and 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. Learn more.)