FOMC Preview: 75bp Hike

“We expect the Fed to raise its target range for the federal funds rate by 75bp in November … In our view, based on the median policy rate path as expressed in the September SEPs and communication from some FOMC participants like San Francisco Fed President Mary Daly, the committee is likely to engage in a debate on the appropriateness of slowing the pace of policy rate hikes beginning in December.

Communicating that the discussion took place should be enough to open the door for a step down to a 50bp rate hike in December, as we currently expect. That said, we expect Chair Powell to say that no decision was taken and the committee remains data dependent. With two employment reports and one CPI report between the November FOMC meeting and the December blackout period, the Fed will be reluctant to pre- commit to a smaller rate hike this far in advance. Data still need to cooperate.

By reaffirming the September median policy rate path, repeating consensus FOMC views that risks to the outlook for inflation still reside to the upside, and emphasizing a willingness to err on the side of tightening to much over tightening too little, we think the Fed can be successful in pushing back against any interpretation that a slower pace of rate hikes implies a lower terminal rate or a quicker pivot to rate cuts. In other words, it is now about the destination, not the journey.”

“The FOMC is set to deliver a fourth 75bp hike at its November meeting next week, raising the target range for the fed funds rate to 3.75-4%. The focus will be on what comes next, and we expect Chair Powell to hint that the FOMC will likely slow the pace to 50bp in December … We expect the FOMC to eventually pair that slowdown to 50bp in December with a somewhat higher projected peak funds rate in the December dot plot. We are adding another 25bp hike to our own forecast–which now calls for hikes of 75bp in November, 50bp in December, 25bp in February, and 25bp in March–and now see the funds rate peaking at 4.75-5%.”