Fed Could Hike Interest Rates by 75 Basis Points Once More then Slow Pace

Expectations abound that the US Fed will once again raise interest rates by 75 basis points, but could slow the pace afterward. According to reports, the US apex bank will raise interest rates on Wednesday and then cut down on rate hikes as early as December. As Michael Gapen, chief US economist at Bank of America, notes:

“We think they hike just to get to the end point. We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December.”

Analysts Ponder Projected Fed Interest Rates Hike

Analysts and observers expect Fed Chair Jerome Powell to take a hawkish approach in his briefing slated for Wednesday. This is in line with the central bank’s primary goal of keeping inflation under control. However, market pros also agree that the Fed risks triggering a violent reaction if it embarks on a more hawkish approach to interest rates.

According to Gapen, Powell may address the notion of reducing the pace of rate hikes without necessarily committing to it. The chief US economist at Bank of America further stated that the Fed would then raise interest rates by a half percentage point in December.

Also analyzing the potential takeaways from Powell’s upcoming press conference, Julian Emanuel, head of equity, derivatives, and quantitative strategy at Evercore ISI, explained:

“The market is very fixated on the fact there’s going to be 75 in November, 50 [basis points] in December, 25 on Feb. 1 and then probably another 25 in March. So in reality, the market already thinks this is happening, and from my point of view, there’s no way the outcome of his press conference is going to be more dovish than that.”

Powell faces the challenge of creating a delicate balance between suggesting the possibility of less-aggressive hikes and adhering to the Fed’s inflation control policy. According to BlackRock chief investment officer of global fixed income Rick Rieder, “he’s going to try to execute the fine art of getting off the 75 [basis points] without creating euphoria and influencing financial conditions too easy”.

Market Hanging in the Balance on Fed Decision

As it stands, the stock market is already bracing for a slowdown in rate hikes by the Federal Reserve following this final 75 basis point jump. Notwithstanding, analysts foresee roiled market reactions if the Fed goes contrary to this stance.

Wednesday’s projected hike of three-quarters of a point would take the fed funds to a rate range of 3.75% to 4%, from zero to 0.25% in March. According to reports, past rate hikes of 75 basis points this year are already contributing to a slowing economy. For example, the housing market is in the doldrums, with some mortgage rates nearly doubling. Meanwhile, consumer inflation in September was at an 8.2% annual basis.

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