US: FOMC signals a possibly higher terminal rate – UOB

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Alvin Liew, Senior Economist at UOB Group, and Victor Yong, Rates Strategist, comment on the latest FOMC event.

Key points

“The United States Federal Reserve (Fed) at its FOMC on November 1-2, 2022, as widely expected, accelerated its rate hike cycle by raising the Fed Funds Target Rate (FFTR) for the fourth consecutive time with a 75 basis point hike up to 3.75-4.00% (unanimous decision).”

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“FOMC Chairman Powell made it clear that the Fed is far from over and that there will be more rate hikes in the future (“We still got some ways to go“). Powell continued to view risks to inflation as being on the upside and underlined the Fed’s determination to bring inflation down to the 2% target, which “it is still necessary to continue raising rates, there is ground to be covered, and we will cover it… We want to make sure we don’t make the mistake of not tightening enough or loosening too soon.” He cautioned that, based on the data, the terminal FFTR will be higher than previously expected, but he also said it might be appropriate to slow the rate of increase “as soon as the next meeting or the next”.”

FOMC Outlook – Chairman Powell’s determination to curb inflation remains unchallenged, but his latest comments gave us a combination of a more aggressive trajectory (in the form of a higher terminal fee) and the possibility of smaller rate hikes as soon as the December FOMC. For 2023, we revised our forecasts as we now expect two more 25 basis point rate hikes, one at the February 2023 FOMC and one at the March 2023 FOMC, which will bring our terminal FFTR forecast to 4.75. -5.00% at the end of the first quarter of 2023 (from the previous forecast of 4.50-4.75%), and a pause in the current rate hike cycle until the first quarter of 2024.

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Source: Fx Street

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