UBS:
Why is the fed funds rate not sufficiently restrictive at this level based on the 2023 dots? In the press conference, Fed Chair Jay Powell responds to the question by saying a majority of the committee thinks it is more likely for the FON1C hike one more time this year. And they need more evidence from data to demonstrate the rate is restrictive enough.
Fed Chair Jay Powell says it is certainly possible the neutral rate is higher at this moment. Powell hedged himself a bit though by saying neutral rate is different from longer-term rate. I think this is the first time Powell has said the neutral rate may turn higher. Market participants had thought Powell would not want to get involved in the discussion of neutral rate.
Deutsche Bank:
Despite the Federal Reserve's median dots showing another interest-rate hike this year, Chairman Jerome Powell's press conference expressed limited conviction in that view
We believe the Fed won't raise interest rates further. Instead, Powell emphasized the ability to proceed carefully and a Committee that are meaningfully split on whether they have already achieved a sufficiently restrictive stance
With projections setting a relatively low bar for skipping that final interest-rate increase, we continue to expect no further rate increases
MUFG:
If the economy cannot deliver on a soft landing and we get all the lagged effects of "higher for longer" rates in Q4-2023 and into H1-2024, the Fed will pivot – they always do – and if they don't because of inflation or because they dig in their heels on their more upbeat assessment of the economy, it is back on track to breaking something in the financial system.
For now, we maintain our view on the rates path ahead, that the July hike was likely the last for the cycle. That said, the risk of a November hike has increased. For us, 25bps more or less does not materially change the outlook (and Chair Powell sort of said the same thing during the presser). The real question is the path 1-2 years forward and can the Fed truly stay on hold at such restrictive levels before being forced to cut rates again?
If the government shuts down, student loan payments impact spending, and the general higher level of rates start to bite, we think they skip hikes ahead, meaning the clock to cuts will have started in July.
TD Securities:
Builds on the higher for longer rhetoric that the Fed has been reinforcing over recent meetings. This helps to maintain tight financing conditions, a prerequisite for the economy to slow sufficiently to get price pressures to ease.
Market participants are leaning towards another hike, with the probability of a 25 basis point move by year-end oscillating between 50%-60%. We will see how Chair Powell couches new forecasts in his upcoming presser, but the team at TD believes the Fed will need to see a significant weakening in forthcoming data for the Fed to fall short of its forecasted intent of raising rates once more.
Commerzbank:
All in all, the probability of another rate hike at the upcoming meeting in November has increased. However, this is about fine-tuning monetary policy; nothing has changed about being at or close to the rate peak. The medium-term outlook is more interesting. If the Fed's projections would indeed materialize, the U.S. central bank would have pulled off the most difficult monetary policy operation, namely a soft landing. We remain skeptical about this and continue to expect a recession in early 2024, in which case more than the two 50 bp rate cuts envisaged by the dot plot for 2024 would be likely
BMO:
As anticipated, the policy statement repeated the forward guidance of the prior two meetings. It said: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” The “may be appropriate” phrase affords the Fed a lot of flexibility. It fit both July’s hike and September’s skip and, therefore, can accommodate either policy choice six weeks from now.
Elsewhere in the statement, the economic assessment said “activity has been expanding at a solid pace” vs. “moderate” before (an upgrade). There was acknowledgement that “job gains have slowed in recent months but remain strong” and, as before, a terse “inflation remains elevated” concluded the paragraph.
The Fed could raise policy rates another notch in November, and it depends on... you guessed it... the data flow between now and then
ING:
The 10yr at 4.3% is suitably more restrictive than it was at the last FOMC meeting when it was below 4%. And it still has upside. The market discount for the bottom of the rate cycle has the funds rate at around 4%, and it has been drifting higher. That places fair value for the 10yr in the region of 4.5%.
The 2yr story is different. Today’s Fed update has seen the 2yr briefly nudge up to 5.15%. It probably does not need to be much higher. The bigger picture in the coming two years will be for the funds rate to be much lower than it is today. That does not need to break even versus a 2yr much above 5%. In fact, this is an area of the curve that can crash lower once it is confirmed that Fed has peaked. Bottom line, a curve steepening (dis-inversion) impulse is probable in the months ahead
RBC:
Chair Powell reiterated that monetary policy is already at 'restrictive' enough levels to push inflation pressures lower over time, and that has let policymakers shift to a more 'data- dependent' approach to future interest rate decisions. To-date, easing inflation pressures have come without significant increases in unemployment, but labour demand (job openings) has continued to slow, credit conditions have tightened, and the growth backdrop is showing more significant signs of slowing in the rest of the world as headwinds from higher interest rates build. We continue to expect that economic growth and labour markets will soften, but the Fed is also still clearly willing to hike interest rates further if inflation were to show signs of reaccelerating.
Natixis:
In the press conference, Powell was in the unenviable position of reconciling an expectation for an additional hike with projections of lower inflation by the end of the year, all without committing to any future policy. He sounded a bit dovish to us, or at least not like someone expecting to need to hike again this year. He repeatedly touted the progress made (and continuing) on inflation and the ongoing rebalancing of labor markets and noted that the effects of interest rate hikes have yet to be felt throughout the economy. He repeated “data dependence” and “proceeding carefully” and similar language that point to further to stasis in policy if incoming data fails to show a convincing trend.
Incoming data since July, though choppy, confirm a trend of cooling prices an economic activity. Still, the Fed is not certain if these trends are going to be sustained and it will be hesitant to make any moves until it has a better read on the persistence of the trends. As FOMC participants still do not see Core PCE inflation returning to the target until 2026, it seems to us that inflation will end up being the deciding factor in the decision over a further hike. With our expectations of 2023 Core PCE inflation below the FOMC’s 3.7% median projection and a weakening economy on the horizon, we think the committee will end up maintaining the current target through the end of the year.
Rabobank:
There are only two FOMC meetings left this year, the next is on October 31-November 1. Today’s new dot plot confirms that the FOMC still has one hike of 25 bps in store for us before the end of the year. However, we still expect the economic data to deteriorate before the November meeting and avert additional rate hikes. In fact, we expect the US to slip into a recession in the final quarter of the year. However, the risk to our baseline remains to the upside. As long as the economy stays strong, and labor markets tight, additional hikes are likely.
Comments