First Fed rate hike in 2023?

While the Fed was successful in announcing a cut with little impact on market volatility, it now faces the challenge of managing rate expectations in the face of risks of high inflation.

The Fed is generally expected to announce the first reduction in the monthly pace of its bond purchases at the next FOMC meeting on November 2-3. We agree and believe that this will reduce the pace by $ 15 billion per month, which would end the program by the FOMC meeting in mid-June 2022. Although the Fed was able to announce As this reduction had little impact on market volatility, it must now take up the challenge of managing rate expectations in the face of the risks of high inflation.

Our base scenario still calls for inflation to return to target at the end of 2022, and the first Fed rate hike in 2023. However, we have raised our inflation expectations further due to the effects of ‘a hurricane and further disruption to the supply chain in China. We now expect inflation to remain high until the third quarter of next year. This longer period of high inflation increases the risk that long-term inflation expectations will also adjust upward, which the Fed will want to avoid. The next few months are therefore likely to test its patience and we see a significant likelihood that rate hikes will be considered sooner than expected when the Summary of Economic Projections is released in December.