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Wednesday, November 30, 2022

Fed will raise interest rates, but market will look at another part of the decision

The market is sure that the Federal Reserve, the central bank of the United States, will raise interest rates tomorrow. The question is whether the increase will be more or less aggressive and, more importantly, whether it will be accompanied by forecasts consistent with the institution’s harsh speech against inflation.

Investors’ majority bet is that the Fed will raise US interest rates by 0.75 percentage point, to the range of 3.00% to 3.25% per year. A much smaller part of the market thinks that the increase could be more intense, of 1.00 percentage point.

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In either of these scenarios, interest rates would rise and stay close to or above 3.4%. This level is important because it was announced in June by the Fed itself as the “appropriate” level for interest rates at the end of this year.

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It is worth noting that, at that time, inflation was accelerating and reaching the highest levels in decades. Even so, there were still members of the monetary policy committee advocating less intense hikes in interest rates.

In the following months, the situation changed.

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In July, all committee members supported a sharp increase in rates. In August, Fed Chair Jerome Powell reiterated his commitment to raising rates even if it hurts the economy.

This was a particularly relevant point in the change in the US central bank’s discourse. Until then, the rhetoric used by the authorities suggested that they dismissed the need to rein in activity to control inflation.

What the market wants to know is whether this shift in discourse will be supported by the Fed’s new forecasts.

What the Fed Should Change

“Forecasts are likely to be less benign this time around,” Mizuho bank said in a report. The new estimates should point to slower economic growth, higher unemployment and a less intense slowdown in inflation.

For interest rates, experts think officials will move to predict rates of more than 4% per annum as appropriate for 2022 and 2023.

UBS, for example, expects forecasts to rise to 4.1% and 4.6%, respectively, and thinks the Fed will emphasize that to put less intense interest rate hikes in the background in the coming months.

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“The message will not be that the pace of interest rate hikes will slow down, but ‘look at how high rates will be by the end of 2023,’” the Swiss bank said in a report, predicting that at its November meeting the rate hike would slow down. at 0.50 percentage point.

Wells Fargo thinks the Fed will change its forecast for the appropriate interest rate to just over 4% by the end of 2023, but also stressed that starting in November, the US central bank should start taking its foot off the accelerator.

Read more:
BlackRock thinks economy will scare the US central bank and that will stop rates

“At some point Powell and his colleagues will feel confident to ease the pace of monetary tightening. With rates close to surpassing 3% a year for the first time in 15 years and the Fed’s balance sheet shrinking at full speed, monetary policy is heading into tighter territory,” he said.

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