This Thursday, the US Federal Reserve is faced with a crucial decision: keep or raise interest rates? As usual, the financial market is on hold. Several professionals from renowned international fund management companies shared with us their perspectives on the possible path the Fed will take.
Eric Winograd, Chief Economist, AllianceBernstein
I don’t think the ECB’s decision last Thursday will influence the Fed’s decision this week, where I continue to expect no hike.
I also doubt that the Fed will provide the same kind of explicit guidance that the ECB provided last week. That said, the Fed’s current dot plot reflects its expectation that there will be one additional rate hike this year; a change in that expectation would be a significant sign that the cycle is over, even if it is not as explicit as the language used by the ECB.
Even if the dots come down, I expect the Fed to keep the door open to further hikes. The US economy gained momentum in the summer, even as the European economy slowed. So even if you think that this acceleration is temporary, as I do, it makes more sense to be cautious than clear about the future path, and that is what I expect the Fed to do.
Franck Dixmier, Global Chief Investment Officer, Fixed Income, Allianz Global Investors
We do not expect a rate hike at the Fed meeting on 19-20 September. Markets are currently pricing in a 44% probability of another 25 basis point hike between now and the end of 2023, but we believe that the Fed has completed its rate hike cycle.
It is true that US economic data continues to surprise investors as it confirms the resilience of the US economy month after month. However, the latest economic data point to continued disinflation, especially in services, and an easing of tensions in the labor market, which are key indicators for the Fed. The downward trend in inflation is also reflected in consumer confidence. One-year consumer inflation expectations fell to 3.1% in August (the lowest since March 2021) from 3.5% in the previous month, while 5-10-year expectations fell to 2.7% from 3% in the previous month.
While the FOMC meeting has no bearing on the likelihood of a rate hike, markets will pay close attention to Fed Chairman Jerome Powell’s speech on the timing of monetary policy changes. After the sharp correction of the short end of the US yield curve over the summer, the slogan “higher for longer” has taken hold. The first rate cut has been delayed and markets expect it to occur in July 2024. Therefore, any upward revision of Fed members’ forward guidance on future interest rates will be closely watched.
In this context, after the pressure on US yields seen in recent weeks, we believe that the time has come to consider the possibility of recovering duration in the US curve, especially at the lower end of the curve.
Gilles Moëc, Chief Economist, AXA IM
While we agree that the ECB should exercise caution as the “risk of overreaching” is significant in Europe, our interpretation is that the main driver of the market reaction was the much stronger-than-expected signal that the ECB is probably “done” and that the transatlantic interest rate differential would not narrow much. Moreover, “it takes two to tango” and the weakness of the euro exchange rate is also a product of some potentially uncomfortable developments for the Fed, which could force the US central bank to “talk tougher” and thus raise the probability distribution around its rate path.
In conclusion, while we do not believe that any of this will trigger any additional Fed action – we stand by our view that the peak of tightening has already been reached – we also think that the data is sufficient to expect the FOMC to adopt a more hawkish stance this week. The “data-dependent” mode is likely to be maintained, which would allow the Fed to “reserve the right” to hike again if necessary, but probably more importantly, we expect the “FOMC members’ median forecast” for the Fed funds trajectory to remain unchanged from the June batch by the end of this year, implying another hike. In fact, the June forecast included two additional hikes, which is consistent with “skipping” some meetings, but still indicates a preference for more visible tightening. In July there was one, there is one to go – and we expect the Fed to keep it up to send the signal that the Fed is not letting its guard down. We think that, from a tactical point of view, removing the last hike from the dot plot could send an overly pessimistic message to the market.
Christian Scherrmann, U.S. Economist for DWS
The pressure to raise interest rates seems to have eased somewhat ahead of the next Fed meeting. Recent comments from US central bankers suggest that their assessment of risk may have shifted somewhat from an exclusive focus on inflation to a more balanced view that includes downside risks to economic momentum. Recent data already suggest that labor market tightness is (slowly) easing and that economic activity is finally moderating, after a very strong summer.
Moreover, policy-relevant core inflation continues to cool gradually, despite an upward surprise in headline inflation, driven by energy prices in August. This surprise data is unlikely to lead the Fed next week to raise rates contrary to expectations, but it highlights the continued risk around inflation. If energy prices continue to rise for longer, emerging pressures on core inflation could eventually influence the Fed’s “data-dependent” reaction in the future. Central bankers will therefore remain vigilant. Far from declaring victory on inflation, the Fed is very likely to maintain its well-known hawkish and higher rate stance for longer.
We expect Jay Powell to reiterate the narrative that the current stance of monetary policy may be sufficiently restrictive and that, given the longer-than-expected delays in monetary policy, higher rates may be needed for longer to bring inflation on a sustainable path towards the 2% target. He is also likely to mention again the upside risks to inflation, which will keep the Fed data-dependent. This is likely to keep market expectations high for another rate hike at the November meeting. On the other hand, we do not expect the Fed to raise rates further and anticipate the first downward adjustment in Q2 2024.
Geir Lode, Head of Global Equities at Federated Hermes Limited
The disinflationary trend we have been observing remains dominant despite yesterday’s modest rebound in US inflation figures, which beat expectations. Combined with further evidence of a weakening labor market, we believe that the Fed will most likely not raise rates next week and that US equities will rally in the near term. However, as interest rate hikes begin to bite, we also expect pressure on US corporate earnings sometime next year and possibly a mild recession. Investors should therefore be prepared to position their portfolios more defensively as the short-term rally fades.
Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable AM
The Federal Reserve will almost certainly “skip” the September meeting and keep the policy rate on hold. policy rate. However, in light of the recent upside surprises in both activity and inflation, it will want to keep a bias on the Fed’s policy rate. inflation, it will want to maintain a hawkish bias. Thus, it is very likely that the updated dot plot will continue to point to a final.
The updated dot plot is therefore likely to continue to point to a final rate hike later in the year, although we do not think they will do so. We do not believe that they will do so.
The Fed is almost certain to leave its policy rates unchanged at this week’s meeting. meeting this week. However, there is more uncertainty as to whether it will have to raise rates slightly in November or December. rates in November or December. Investors are evenly split on a rate hike in the futures market. rate hike in the futures market. There are valid arguments on both sides.
On balance, we believe that lower inflation rates, the cooling labor market, and our expectations that growth will fall. our expectation that growth will fall below its trend rate in the fourth quarter point to no further point to no further hikes this year. However, it is likely that the Fed is likely to keep its options open, given the acceleration of activity in the third quarter and the pick-up in inflation in August. the pick-up in inflation in August.
François Rimeu, Senior Strategist at La Française AM
At this week’s meeting, the US Federal Reserve (Fed) will most likely keep policy rates unchanged, as widely expected by the markets. will most likely leave official interest rates unchanged, as widely expected by the markets. However, this meeting could bring a lot of volatility, given the many uncertainties about the direction of future Fed decisions. the direction of future Fed decisions.
We expect the Fed to maintain a hawkish bias at this press conference and to reiterate the Fed’s hawkish message. and reiterate the message that rates will have to remain high for a long period of time in order to reduce inflation until the period of time to bring inflation down to the 2% target. Therefore, this meeting could lead to a rate hike and a moderate flattening of yield curves.
