Federal Reserve: December hike expectations – BNY

BNY Markets’ John Velis previews the October FOMC, expecting no rate hike this week but a possible move in December. He notes market-implied probabilities show the Fed funds rate peaking just above 4.5% with around three more hikes by next year. Velis highlights potential hawkish dissents, Fed credibility, and doubts that the full 100bp tightening priced by markets will be delivered.

FOMC path, dissent and credibility

"In line with the market, we don’t foresee a rate hike at the October FOMC tomorrow and prefer to place our expectations for further tightening on the December meeting. Based on Fed commentary and a steady, if sticky, inflation outlook, we don’t think the weight of the Committee will fall on the hawkish side."

"Rates aren’t expected to rise at a steady, meeting-by-meeting pace and are actually expected to top out at just above 4.5%, indicating around three more hikes by this time next year."

"That said, we do expect at least one dissent, if not more, in favor of raising rates. If we’re right, and there is an objection (or two), we would expect the market to interpret Wednesday’s decision hawkishly, solidifying the expectation of a hike at the end of the year."

"At the press conference, we don’t see any preview of what we expect to be a December hike, given Chair Kevin Warsh’s disinclination to provide guidance on future policy moves. Nevertheless, we think that market expectations for a December hike will be solidified."

"Yet we’re not convinced the Fed can deliver the 100bp that’s been priced in since the beginning of the tightening cycle, and we’re not sure it would be needed if inflation doesn’t broaden out to cyclical items."