Fed interest rate hike: when go down?

Fed interest rate hike: when go down?

Fed interest rate will hike by 50 basis points to 4.5% at the December FOMC meeting and by 25 basis points at the meetings in February and March of 2023.

Current Fed interest rate

At its meeting on November 2, the Fed increased interest rates by three-quarters of a percentage point, marking the fourth consecutive increase of this size. But Fed chair Jerome Powell signaled during a press conference that the Fed may soon begin to decrease the pace of hikes.

According to the Fed’s minutes, “a number of participants observed that it would become appropriate to decrease the pace of increase in the target range for the federal funds rate as monetary policy neared a posture that was sufficiently restrictive to meet the Committee’s aims.”

In a research note, the bank stated that it now anticipates a 50 bp increase from the Fed in December and 25 bp increases in February, March, and May.

Fitch Ratings-London, 10 November 2022: As a result of the past two months’ faster rise in global interest rates than anticipated, Fitch Ratings’ September 2022 Global Economic Outlook now predicts that the peak in Federal Reserve and ECB policy rates will occur later and at a higher level (GEO). Stubbornly high inflation outturns and a tightening of central bank intent to drive inflation down make a swing back towards rate decreases in 2023 implausible.

In view of this, traders are currently pricing in a probability of more than 75% that the Fed would only increase rates by a half-point at its meeting on December 14 according to futures contracts on the CME. This is an improvement above the odds of 52% for a half-point increase from a month ago. But it is still less likely than the 85% probability of a half-point increase that was price in only last week.

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When Will Interest Rates Go Down?

Fitch currently anticipates that the Fed Funds rate will increase by 50 basis points to 4.5% at the December FOMC meeting and by 25 basis points at the meetings in February and March of 2023. Through the rest of 2023, Fitch ratings anticipate that rates will continue at 5.0%.

After putting in a further quarter-point Federal Reserve hike in May 2023, Goldman Sachs increased its prediction for the federal funds rate peak by 25 basis points to 5-5.25%.

Morningstar forecast a year-end federal funds rate of 3% in 2023 against a consensus estimate of 4%. The fed funds rate and 10-year Treasury yield are projected to be 1.75% and 2.75%, respectively, in 2026 in the long term. However, because monetary policy is more supportive, it is anticipated that interest rates would fall below these levels in 2024 and 2025.

Will the GDP of the USA increase?

In the second half of 2022, the United States’ real GDP will grow modestly, at a rate of about 0.3% per quarter, according to the ratings firm Fitch.

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Gross Domestic Product (GDP)

But a slowdown in job growth, growing unemployment, aggressive interest rate policies and greater inflation is likely to take a toll on consumer spending in 2023, Fitch warned.

Morningstar expects the cumulative GDP will expand by around 2.5% more than the consensus through 2026 based on the long-term estimates that are currently available. The overall consensus continues to be too gloomy about the labor supply recovering and has often overreacted to short-term challenges. Their in-depth analyses of the labor market and other supply-side pillars of the economy serve as the basis for their five-year GDP estimates.

USA GDP forecasts revisions
Source: https://www.morningstar.com/

Will the inflation of the USA increase?

Growing inflation in the services sector is quite concerning as it indicates that inflationary pressures are becoming more ingrained and self-reinforcing. Inflation for services in the US has increased from 6.1% in January to 6.7% in now. A number of factors, notably the US’s quickly rising rental inflation, contribute to the high services inflation. However, over the longer term, wage growth and service inflation are tightly associated.

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USA Inflation 2022 – Is rising further?

forecast for inflation. By 2023, morningstar predict that pricing pressures will shift from inflationary to deflationary, mostly as a result of the easing of price spikes brought on by supply shortages in durable goods, energy, and other sectors. This will make it considerably simpler for the Fed to control inflation. In fact, we can anticipate that the Fed will exceed its target, with inflation averaging 1.7% between 2023 and 2026.

USA Inflation 2022 - Is rising further?
Source: https://www.morningstar.com/

Is the USA in a recession?

According to a new prediction made yesterday at the 13th annual Inland Empire Economic Forecast Conference, held at the UC Riverside School of Business, the U.S. economy has little chance of going into a recession this year or the the next year unless the Federal Reserve raises interest rates more than they are currently projecting.

The new prognosis predicts that if the Fed uses force to reduce its balance sheet to suppress inflation in the near term, it would raise interest rates, drastically cool the financial markets, and likely trigger a minor recession in 2019 that will be driven by consumer spending reductions.

In the long run, however, if Fed action is insufficient, the US may face several years of extremely slow growth, leaving consumers in a relatively precarious financial position.

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