We expect the Federal Reserve to increase its policy rate by 75 basis points to a range of 3.75%-4% when it publishes its policy decision on Nov. 2.
Fed Chair Jerome Powell will almost surely utilize the press conference following the Federal Open Market Committee meeting to note that at one point it will make sense to slow the pace of rate hikes as the central bank ascertains the lagged impact of past rate hikes on the real economy. This will be paired with the text of the policy statement, where the Fed will likely retain language stating “that ongoing increases in the target rate will be appropriate.”
Despite the clear sense of continuity that will be conveyed by the official statement, any mention of a potential slowing of the pace of rate hikes by the Fed in the press conference will almost certainly bolster risk-taking across asset markets in its aftermath. That being said, I do not expect a more explicit indication that the Fed has committed to a slower pace of hikes at its subsequent December meeting. Rather, the central bank will remain comfortable with the constructive ambiguity implied by its statements, Powell’s outlook and the flexibility embedded in its policy path.
This, of course, will provide an opportunity for the FOMC to debate the policy path, and we expect at a minimum a 50-basis-point hike in December followed by a 50-basis-point hike in January of 2023, and a 25-basis-point hike at the March meeting. Together, these hikes would bring the policy rate to a range of 5%-5.25%, where we think the Fed may choose to pause its efforts to restore price stability.
As the duration of the tightening cycle increases, the probability of a dovish dissent increases. While we do not anticipate any dissents during the upcoming November FOMC meeting, it is likely there will be one going forward. Risks around the economic outlook deteriorate and global financial stress increases on the back of interest rate differentials between the United States and foreign central banks that has caused the value of the dollar to soar, the real price of importing oil for everyone else to increase and the cost of dollar-denominated debts to rise.
In fact, we expect that to be one the primary avenues of questioning that Powell will face during the press conference.