The US Federal Reserve raised its Federal Funds Rate (FFR) by 75 basis points (bps), taking it to the highest level since the Global Financial Crisis, to 3% to 3.25%. The 75 bps hike was more than fully priced in, but the new dot plots imply another 120 bps or so of interest rate hikes by year end, which is why market watchers are expecting a 75 bps hike in November and most likely, a further 75 bps hike in December. The median FFR dot plot for 2023 was raised to 4.6% (from 3.8%).
Ray Sharma-Ong, investment director, multi-asset investment solutions at abrdn, says: “The Fed does not intend to slow down anytime soon with chairman Jay Powell indicating that three conditions need to be met before pace of rate hikes will moderate.” These are below-trend growth, softer labour market conditions and evidence that inflation is moving back to 2%.
“As such, we expect a Fed monetary policy induced recession, and that the Fed will only ease after a recession has occurred. The probability of a hard economic landing has increased, and we would not be surprised if terminal policy rates go up to 5%,” Ong says. “In the near term, we see US 10-year yields possibly pushing towards 3.75%–4%, however we foresee the curve inverting further as the back end of the curve lags.”