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FOMC preview: Has the Fed done enough?

As Federal Reserve officials conclude their two-day meeting on Wednesday, it is widely anticipated that interest rates will remain unchanged. The bond market is sending a clear signal that, with inflation trends trending favorably, the Fed is likely finished with raising interest rates during this economic cycle. The money markets are assigning a 99% probability that the Fed will hold on Wednesday, while the November hike chances are projected at 33%. This decision by the Fed reflects a delicate balancing act as they aim to support economic growth while keeping inflation in check. The central bank has been vigilant in monitoring inflationary pressures, and this data-driven approach has led to earlier rate hikes. However, the latest signs suggest that inflation may be moderating, offering the Fed some breathing room. Here’s what the prominent Fed watchers expect from Jerome Powell and his team. UBS economists: “We expect a relatively dovish outcome wrapped in data dependence… We think participants are generally comfortable with the level of nominal rates, and that the median dot in 2023 revises down with the downward revisions to inflation projections we expect. We walk through the logic inside. That is not to say we think the FOMC is committing to no more rate hikes. Instead, we expect Chair Powell to say the FOMC is prepared to raise rates further if appropriate. We expect the median participant is willing to wait and see if inflation falling, making the real rate more restrictive over time, can do the remaining work for them.” Nomura economists: “We expect the Fed will keep rates on hold at 5.25-5.50% at the September meeting in line with current market pricing. Data since the July meeting have been dovish. Core inflation has eased significantly, and we see signs that a sustainable disinflation process has begun. The labor market has also begun to cool gradually, with payrolls growth and job vacancies slowing in the latest data. We expect the summary of economic projections to show faster growth and lower core inflation in 2023, with limited changes to forecasts for 2024 and beyond.” Goldman Sachs economists: “The immediate question for markets is whether the median dot will continue to project an additional hike this year to 5.5-5.75%, presumably in November. We think that it will, but only by a narrow majority, and in part for the strategic purpose of preserving flexibility. We continue to think that the FOMC will ultimately decide in November that it has made enough progress in the inflation fight to leave the funds rate unchanged.” Citi economists: “The FOMC is widely expected to “skip” hiking on Wednesday at 2PM and policy rates are likely now within 25bp of the terminal rate. Much stronger than expected growth, tight labor markets and remaining upside risk to inflation keep risks skewed hawkish. The 2023 median “dot” will likely continue to show one more 25bp rate hike (which we expect to be delivered in November). In our base case, the 2024 median dot will stay put but risks are to a shift higher which would reinforce a higher-for-longer message.” Bank of America analysts: “We expect the Fed to maintain the target range for the federal funds rate at 5.25-5.5% at the September FOMC meeting. This outcome would be consistent with both recent Fed communications and current market pricing. We expect no change to the Fed’s balance sheet policies.”

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