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Tuesday, September 27, 2022

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Fed likely to slow pace after 75 basis point hike next week

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They expect the Federal Open Market Committee (FOMC, for its acronym in English) raise rates by half a percentage point in September and then switch to quarter-point increases in the remaining two meetings of the year. That would raise the upper range of the central bank’s monetary policy target to 3.5% by the end of 2022, the highest level since early 2008.

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For the September meeting, the survey results are slightly more dovish than interest rate futures in financial markets, which currently discount a greater than 50% probability of a 75 basis point increase, assuming a rate hike. 75 basis points next week. But the broader path envisioned by economists is slightly more restrictive than the one implied by market prices.

It’s also steeper than expected before the June meeting, when the FOMC forecast rates would rise to 3.4% by the end of the year and 3.8% in 2023.

June’s 75 basis point increase was the largest since 1994. Powell has said that increases of 50 or 75 basis points would be on the table at the Fed meeting scheduled for July 26-27, although comments from many central bankers have focused on a 75 basis point increase.

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The survey of 44 economists carried out from July 15 to 20 predicts that the fed will raise rates another 25 basis points in early 2023, peaking at 3.75% before pausing and starting to cut rates before the end of that year.

There is an overwhelming consensus that the FOMC will raise the rate by 75 basis points this month. Only the US economics team from Nomura Securities expect a full percentage point increase. The Governor of the fed Christopher Wallerone of the most restrictive members of the FOMCsupported an increase of 75 basic points, and the president of the fed from Atlanta, Raphael Bosticwarned that making very drastic increases would have negative indirect effects.

If the fed makes another 75 basis point hike next week, the combined 150 basis point hike during June and July would represent the steepest increase in rates in the fed since the early 1980s when Paul Volcker he was president and he was fighting against sky-high inflation.

There would be no interest in making a full point hike at any point during this cycle of rate hikes, according to the opinion of almost all economists who participated in the survey.

Source: Gestion

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