Federal Open Market Committee (FOMC) will raise interest rates by another 0.75 percentage points for the fourth straight meeting. When Fed started raising the rates by 75 basis points, they did not want that it becomes a norm. However, by repeating it four times, the Federal Reserve is apparently going to break its promise.
Don’t forget the importance of Powell’s press conference!
With this 75-bps expected rate hike, consumer borrowing costs in the US will reach higher levels since late 2007 and early 2008. Fed officials repeatedly told that their main goal is to control inflation. However, with this sharp rate hike that we saw so far and the expected levels of borrowing costs, it increases the risk of recession, and it can even take the possibility of a soft landing out of the equation. Therefore, as recession risks in the US rise and turmoil mounts across the globe, we are expecting that among 75 rate hikes, fed start whispering about slowing down the pace of interest rate raises and even scheduling the rate cut.
What is the overall expectation is to see some signals that Fed is thinking about a 50-bps rate hike for the December meeting, but still emphasizing that everything depends on economic data, and they will act along with the process of economic growth and inflation.
On the inflation front, since June, when inflation is seen at a 9.1% high, price pressure cooling down. But Core inflation (Excluding the volatile food and energy categories), surged for a second straight month in September to 6.6 percent, a fresh 40-year high. According to Fed’s September projections, officials expected to take interest rates to a peak of 4.5-4.75 percent. While Core inflation is raising, and the labor market is strong enough with the unemployment rate at 3.6% and more than 10 million JOLTs seen in last month’s data, there are some FOMC members like Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard supporting another 75 bps rate hike in December as well.
If Fed raises the rates by 75 basis points and:
a) Points out the need to move more cautiously and slow down the rate of an interest rate increase, marker participants will read it as a dovish decision, which is positive for the stock markets and negative for the US dollar.
b) Does not point out the possibility of a 50-basis point rate hike and just mentions about decision-making process based on economic data, it would be a natural decision. The natural decision would not be positive for the stock markets, but pressures will be much less on them, while the US dollar still can rise at a slower pace.
c) Does not point out the possibility of a 50 basis point rate hike, and talks about the continued high level of inflation, mentioning that the labor market also is still strong. That must be read as a hawkish tone, which means the new highest for US dollars and more pressure on the stock markets.
In fact, everything depends on the Fed press conference and the speech of the central bank officials in the coming days.