US - Fed to remain hawkish

With no new update to the quarterly macro and rates projections at this meeting, markets will be focused on the policy statement and Chair Powell’s press conference for clues on the future path for rates. Our base case is for the Fed to hike at a reduced, 50bp pace at the December meeting, taking the upper bound of the fed funds rate to 4.5%. Thereafter, we expect a pause in tightening. However, we doubt the Fed will be in a hurry to signal this at the coming meeting. If the Fed does opt to signal a smaller rate hike in December, it will likely accompany this with language suggesting rates may have to go higher than previously thought (the last projections suggested a peak in the fed funds rate upper bound of 4.5% in September). In either scenario, Chair Powell is likely to remain resolutely hawkish in his press conference remarks.

Fed will want to avoid a premature easing in financial conditions – We think the Fed will continue the recent trend among central banks of refraining from offering detailed forward guidance. This is for two reasons. The first is the continued high degree of uncertainty over the outlook. While pipeline inflationary pressures have eased, and demand is cooling, labour supply and demand remain significantly out of balance, and monthly inflation readings are still red hot. As such, although inflation is expected to come down over the coming months, uncertainty is high. The second reason is one of communication strategy. Financial conditions have tightened considerably in the US, albeit not (for the most part) to historically extreme levels. And the Committee will likely not want to trigger a premature easing in financial conditions at this stage. As such, even though the Committee is likely minded to shift to a smaller rate hike increment in December, it will want to get as much ‘bang for buck’ in terms of tightening impact in the meantime. This means the Fed will most likely signal (via speeches or leaks to the media) nearer the time of the 13-14 December meeting its preference for a smaller rate hike, and this will probably also be hinted at in the meeting minutes released on 23 November. At the time of the December meeting itself, we would expect a smaller rate hike to be accompanied by more hawkish rates projections as a means of offsetting the impact of a reduced hiking pace.