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Sunday, October 30, 2022

FOMC Preview: 75bp Hike

by Calculated Risk on 10/30/2022 10:28:00 AM

Expectations are the FOMC will announce a 75bp rate increase in the federal funds rate at the meeting this week.

From Merrill Lynch:
"We expect the Fed to raise its target range for the federal funds rate by 75bp in November ... In our view, based on the median policy rate path as expressed in the September SEPs and communication from some FOMC participants like San Francisco Fed President Mary Daly, the committee is likely to engage in a debate on the appropriateness of slowing the pace of policy rate hikes beginning in December.

Communicating that the discussion took place should be enough to open the door for a step down to a 50bp rate hike in December, as we currently expect. That said, we expect Chair Powell to say that no decision was taken and the committee remains data dependent. With two employment reports and one CPI report between the November FOMC meeting and the December blackout period, the Fed will be reluctant to pre- commit to a smaller rate hike this far in advance. Data still need to cooperate.

By reaffirming the September median policy rate path, repeating consensus FOMC views that risks to the outlook for inflation still reside to the upside, and emphasizing a willingness to err on the side of tightening to much over tightening too little, we think the Fed can be successful in pushing back against any interpretation that a slower pace of rate hikes implies a lower terminal rate or a quicker pivot to rate cuts. In other words, it is now about the destination, not the journey."
From Goldman Sachs:
"The FOMC is set to deliver a fourth 75bp hike at its November meeting next week, raising the target range for the fed funds rate to 3.75-4%. The focus will be on what comes next, and we expect Chair Powell to hint that the FOMC will likely slow the pace to 50bp in December ... We expect the FOMC to eventually pair that slowdown to 50bp in December with a somewhat higher projected peak funds rate in the December dot plot. We are adding another 25bp hike to our own forecast—which now calls for hikes of 75bp in November, 50bp in December, 25bp in February, and 25bp in March—and now see the funds rate peaking at 4.75-5%."
Analysts will be looking for comments on the size of future rate hikes.

Projections will NOT be released at this meeting. For review, here are the September projections.

In September, most participants expected seventeen 25bp rate hikes in 2022. The FOMC raised rates 25 bp in March, 50 bp in May, 75 bp in June, 75 bp in July and 75 bp in September. That is twelve 25 bp increases so far, and the Fed expects rates to raise rates 75 bp at this meeting and 50 bp in December.

Current Wall Street forecasts are for GDP to increase slightly in 2022 Q4 over Q4 in line with FOMC projections.  For example, BofA is projecting:
We now forecast GDP growth to slow to 0.2% in 2022 (4Q/4Q) and expect growth to slow to -0.9% in 2023 (4Q/4Q) as the lagged effects of tighter monetary policy and financial conditions cool the economy.
Goldman is tracking real Q4 GDP at a 0.8% annualized rate, that would put Q4/Q4 at 0.3% in 2022.  

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202220232024
Sept 20220.1 to 0.30.5 to 1.51.4 to 2.0
June 20221.5 to 1.91.3 to 2.01.5 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.5% in September. So far, the economic slowdown has not pushed up the unemployment rate.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202220232024
Sept 20223.8 to 3.94.1 to 4.54.0 to 4.6
June 20223.6 to 3.83.8 to 4.13.9 to 4.1
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of September 2022, PCE inflation was up 6.2% from September 2021. This was below the cycle high of 7.0% YoY in June. There was a surge of inflation in Q4 2021, so with less inflation in Q4 this year, it is possible inflation will decline to the projected year-over-year range in Q4.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202220232024
Sept 20225.3 to 5.72.6 to 3.52.1 to 2.6
June 20225.0 to 5.32.4 to 3.02.0 to 2.5

PCE core inflation was up 5.1% in September year-over-year. This was below the cycle high of 5.4% YoY in February.  Core inflation has picked up more than expected and will likely be above the Q4 projected range.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202220232024
Sept 20224.4 to 4.63.0 to 3.42.2 to 2.5
June 20224.2 to 4.52.5 to 3.22.1 to 2.5