Analysts have claimed that the Federal Reserve will hike interest rates by 75 basis points on Wednesday before reducing the hike size in December.
Bank of America economist Michael Gapen said that Fed chief Jerome Powell would announce the central bank’s plan to slow down its rate hikes during an upcoming press briefing. The economist added that the Fed might hike the interest rates by 50 basis points in December’s FOMC meeting.
“We think they hike just to get to the end point,” Gapen added. “We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December.”
According to Gapen, the Fed aims to have the interest rates at around 4.75 to 5 percent by next spring, which is the central bank’s terminal rate. The three-quarters of a percentage point hike at November’s FOMC meeting would bring the rate between 3.75 percent and four percent.
Evercore ISI head of equity, derivatives and quantitative strategy Julian Emanuel said the market expected a 75 basis points hike in November, which would slow down in the following months. Because of that, Emanuel added that it was unlikely for the Fed to be “dovish” in November’s rate-setting meeting.
The stock market rallied over the expectation that the Fed would slow down its rate hikes. However, investment strategists warned investors might react negatively if the Fed did not fulfill their expectations. Analysts said that Powell should be able to signal the possibility of less-aggressive hikes and, at the same time, uphold the central bank’s pledge to control inflation.
BlackRock chief investment officer Rick Rieder said that Powell would try to signal less hawkish rate hikes without “creating euphoria and influencing financial conditions too easy.” Rieder argued that the Fed would be careful not to tamper with the stock price and cause bond yields to soar.
Rieder added that there was a possibility that once interest rates reached their terminal point, they would stay in that position for a while. He said that investors in the equity market were expecting this development because they were “tired of getting bludgeoned.”
Economy slows down
Data indicated that the U.S. economy was slowing down. One of the indicators was the slump in the housing market. Freddie Mac data showed 30-year fixed-rate mortgage was 7.08 percent last week, up from 3.85 percent in March.
Rieder said that the economic slowdown was also visible in the automobile market and some retailers. Market surveys also indicated an economic slowdown in the past month. Rieder insisted that the Fed should rely on incoming inflation data because the pace of the decline was still unclear.
The September consumer price index (CPI) showed an 8.2 percent annual basis, with yearly growth for core CPI at the highest since August 1982. The CPI for October will go public on November 10. Analysts maintained that the Fed should consider other options if the inflation remained “surprisingly high.”
Gapen argued the U.S. would enter a “shallow” recession in Q1 of 2023. The economist said that the equity market would be the most affected, especially if the inflation rate stayed high because the Fed would then raise rates higher than expected. Analysts have predicted that the Fed’s rate hike will be around 25 basis points starting in 2023.