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Hawkish Bias
Macro Markets
The markets are currently pricing in that FOMC will leave its funds rate target range unchanged at 5.25%/5.50%. However, the market expects a hawkish bias ahead, especially for November. The odds of a hike for November sit around 30% at the moment and +15% for a 25 bp rate hike at the following meeting that ends on December 13. Starting in 2024, the markets are not looking for any rate hikes and are discounting roughly a -50 bp rate cut in 2024 from the current level and a further -50 bp rate cut in 2025.
The Fed is expected to announce a so-called “hawkish pause,” meaning that the Fed will maintain a hawkish bias and will leave open the possibility of one last rate hike. Whether the Fed pulls the trigger on that last rate hike depends on the incoming economic data.
The Fed’s primary decision factor will be the inflation outlook. The FOMC will not rule out any further rate hikes until Fed members are virtually positive that the inflation rate is down to the Fed’s target of 2%. However, it may take some time to see that actual inflation drop since the FOMC is currently projecting that the PCE deflator will end this year at +3.2% (core at +3.9%) and will dip slowly to +2.5% (2.6% core) by the end of 2024 and to 2.1% (2.2% core) by the end of 2025. The FOMC expects the PCE deflator to eventually average +2.0% over the long run.
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