OPINION
Market Rating Before FOMC MeetingJan 31
FED May Increase Rates by 75 BPS for The Last Time
Global markets have focused on the outcome of the November meeting of the Federal Open Market Committee (FOMC), which will conclude today. Market expectations are for the FOMC to raise interest rates by 75 basis points, lowering the federal funding target to the 3.75 - 4.00 range.
At its September meeting, the US Federal Reserve (FED) increased the policy rate range for the third time in a row by 75 basis points to the range of 3.00-3.25%. In the Economic Projections Report published by the Bank at the meeting, the Committee members' interest rate expectations for the end of the year rose from 3.4% to 4.4%, and from 3.8% to 4.6% for 2023.
At today's meeting, it is almost certain that the Committee will tighten policy by another 75 basis points, adhering to the September guidance. But it is the size of the next rate hike that will be critical to the meeting.
At this point, headline inflation in the world's largest economy continues to decline. However, it is not yet at the desired level. As a matter of fact, according to the Ministry of Labor, the consumer price index (CPI) increased by 0.4% in September compared to the previous month and decreased to 8.2% on an annual basis. In this period, the core CPI reached the highest level of 40 years with 6.6%.
On the other hand, the US economy has been out of the technical recession. The gross domestic product (GDP) in the country increased by 2.6% compared to the previous quarter in the 3rd quarter preliminary reading and grew by 1.8% on an annual basis. In addition, the unemployment rate decreased by 0.2 points in September to 3.5%, again falling to the lowest level in 50 years. The tightness of the labor market in the USA relieved the FED to raise interest rates by 75 basis points for the fourth time at its November meeting.
However, high-frequency data is signaling a slowdown in the leading sectors of the economy. The manufacturing purchasing managers index (PMI), the leading indicator of economic performance, dropped to its lowest level since May 2020 with 50.2 points in October, according to the Institute for Supply Management (ISM). In the same period, the services PMI decreased by 2.7 points compared to the previous month to 46.6, indicating that the contraction in the sector continues.
On the other hand, 30-year mortgage interest rates in the USA reached the highest level in 21 years with 7.16%, while new home sales decreased by 10.9% in September and could only increase by 603 thousand. This outlook signals that a negative growth may be experienced again in the last quarter. Moreover, it may be more severe than the 0.6% contraction in the second quarter.
To sum up, it is highly likely that the FED will raise interest rates by 75 basis points for the fourth time today, while it still has room in the soft landing scenario. However, while high-frequency data indicate that economic activity lost significant momentum in the last quarter, it is unlikely that the FED will deepen recession risks by maintaining its aggressive tightening cycle.
In this respect, we think that today's meeting, following the September guidance, will be the end of the aggressive tightening of 75 basis points. At the last meeting of the year in December, the FOMC is now likely to downshift and signal an interest rate hike of 50 basis points in December and 25 basis points in January.
The FED's slowdown in monetary tightening may ease the pressure in, especially, the stock and cryptocurrency markets. The indicator SP500 index may aim to exceed the psychological 4 000 points. The dollar, on the other hand, is unlikely to enter a significant retracement path due to its safe-haven feature.
At its September meeting, the US Federal Reserve (FED) increased the policy rate range for the third time in a row by 75 basis points to the range of 3.00-3.25%. In the Economic Projections Report published by the Bank at the meeting, the Committee members' interest rate expectations for the end of the year rose from 3.4% to 4.4%, and from 3.8% to 4.6% for 2023.
At today's meeting, it is almost certain that the Committee will tighten policy by another 75 basis points, adhering to the September guidance. But it is the size of the next rate hike that will be critical to the meeting.
At this point, headline inflation in the world's largest economy continues to decline. However, it is not yet at the desired level. As a matter of fact, according to the Ministry of Labor, the consumer price index (CPI) increased by 0.4% in September compared to the previous month and decreased to 8.2% on an annual basis. In this period, the core CPI reached the highest level of 40 years with 6.6%.
On the other hand, the US economy has been out of the technical recession. The gross domestic product (GDP) in the country increased by 2.6% compared to the previous quarter in the 3rd quarter preliminary reading and grew by 1.8% on an annual basis. In addition, the unemployment rate decreased by 0.2 points in September to 3.5%, again falling to the lowest level in 50 years. The tightness of the labor market in the USA relieved the FED to raise interest rates by 75 basis points for the fourth time at its November meeting.
However, high-frequency data is signaling a slowdown in the leading sectors of the economy. The manufacturing purchasing managers index (PMI), the leading indicator of economic performance, dropped to its lowest level since May 2020 with 50.2 points in October, according to the Institute for Supply Management (ISM). In the same period, the services PMI decreased by 2.7 points compared to the previous month to 46.6, indicating that the contraction in the sector continues.
On the other hand, 30-year mortgage interest rates in the USA reached the highest level in 21 years with 7.16%, while new home sales decreased by 10.9% in September and could only increase by 603 thousand. This outlook signals that a negative growth may be experienced again in the last quarter. Moreover, it may be more severe than the 0.6% contraction in the second quarter.
To sum up, it is highly likely that the FED will raise interest rates by 75 basis points for the fourth time today, while it still has room in the soft landing scenario. However, while high-frequency data indicate that economic activity lost significant momentum in the last quarter, it is unlikely that the FED will deepen recession risks by maintaining its aggressive tightening cycle.
In this respect, we think that today's meeting, following the September guidance, will be the end of the aggressive tightening of 75 basis points. At the last meeting of the year in December, the FOMC is now likely to downshift and signal an interest rate hike of 50 basis points in December and 25 basis points in January.
The FED's slowdown in monetary tightening may ease the pressure in, especially, the stock and cryptocurrency markets. The indicator SP500 index may aim to exceed the psychological 4 000 points. The dollar, on the other hand, is unlikely to enter a significant retracement path due to its safe-haven feature.
