The market expects the Fed to bring interest rates to 4% before 2023

The time has come for the first meeting of the Federal Reserve after the holiday break, and to learn about the update of the institution’s macroeconomic forecast table.

It will be the first review since June, and it seems to be assumed that the forecasts released by the Fed at that time have been completely out of date. Inflation continues to be very high, although there are signs that indicate that it may have already peaked, but, above all, what is clearly out of date is the table of forecasts on the rates maintained by the institution, the famous dot plot (graph of points).

It is a graph in which the different members of the Fed’s Board of Governors indicate where they think interest rates will be in the coming years. In July, the average was between 2.5% and 2.75%, an estimate that is no longer realistic, since rates have already reached that level, and there is no doubt that they will continue to rise. Moreover, analysts already predict, according to the latest survey carried out by Bloomberg, that rates will reach 4% before the start of 2023.

Of course, this will be the ceiling that the price of money in the United States will reach during this cycle, if the estimates are met, and it will require two rate hikes of 75 basis points in the three meetings that remain until the end of the year.

As for the balance of assets, experts expect it to shrink to 6.5 trillion dollars in 2025.

The biggest rise since 1984

The big question ahead of Wednesday’s meeting is whether the institution is going to raise rates by 75 basis points, as it has done on the last two occasions, or whether it is going to venture out and opt for an increase of 100 basis points, the first since 1984. The futures market is a good example of the uncertainty that exists around this decision: it discounts an increase of 84 basis points at the meeting, still closer to 75 than 100, but practically in the half of the fork that is being shuffled at the moment.

“The Federal Reserve remains firmly committed to reining in inflation, and its resolve may even have increased following the release of US CPI data earlier this week, which came in higher than expected. Some analysts now await the announcement of a one percentage point rate hike when central bank officials meet next week,” ActivTrades said.

It is precisely the possibility of seeing a rise in interest rates of at least 75 basis points, which has generated the latest fall in the stock markets, last week, after the bad inflation data for August in the North American giant was known. . “Hopes that inflation may finally be under control were dashed this week as US consumer prices rose another 0.1%, defying market expectations of a month-on-month slowdown”; explains Geir Lode, head of global equities at Federated Hermes. Equity investors have been quick to cut their exposure to interest rates in an attempt to get ahead of what appears to be a minimal 75 basis point hike by the Federal Reserve.

Macro Frame Review

Although the latest inflation data in the United States has not been positive, and has exceeded analysts’ expectations, experts surveyed by Bloomberg believe that the Fed will keep its inflation forecasts for the coming years intact. In June, the institution published the forecast of an advance in the CPI of 5.2% this year, 2.6% in 2023 and 2.2% in 2024, the same figures that are expected to be published this time.

However, the consensus does expect GDP growth forecasts to be updated, and the expectations are not at all positive: from an expected growth of 1.7% for 2022, they now expect the Fed to cut it to 0.5%; the 1.7% that they estimated in June for 2023 will drop to 1.4%, if the forecasts are met, and for 2024 they expect it to drop from 1.9% to 1.7%.

As for the possibility that the Fed ends up plunging the US economy into a recession due to the tightening of monetary policy, the uncertainty is also great on this front. 49% of those surveyed believe that the economy will suffer a recession in the next 24 months, while 33% expect GDP to contract for a while in the American giant, but not enough to consider that it has fallen into recession. Only 19% of those surveyed believe that the economy will manage to avoid recession in the next 2 years.