KResearch expects that the US Federal Reserve (Fed) will consider raising its policy rate by another 0.75 percent at the upcoming Federal Open Market Committee (FOMC) meeting, November 1-2, 2022, marking a 0.75 percent policy rate hike for the fourth consecutive meeting. Although the US headline inflation rate may have peaked in June 2022, core inflation has accelerated to a 40-year high of 6.6 percent, while the Core Personal Consumption Expenditure (Core PCE) that the Fed attaches importance to has also surged, reflecting elevated inflationary pressure even as energy prices, especially oil, have begun to decline. Meanwhile, the US labor market has remained tight even as the unemployment rate fell to 3.5 percent once again in September 2022. Despite a slowing sign seen in US employment, it has remained relatively robust.
For the upcoming FOMC meeting, markets have attached importance to the Fed's signals of its future monetary policy stance. KResearch is of the view that the Fed may cut the size of its interest rate hikes ahead, because the US economy is poised to slow down although it will depend chiefly on inflation and employment figures. If the US inflation weakens amid the slowing US economy and labor market, the Fed may not raise its policy interest rate by 0.75 percent, but rather by 0.25-0.50 percent at its subsequent meetings in December 2022 and through to 2023. According to the CME FedWatch Tool, markets expect that the Fed Funds rate may peak at approximately 4.75-5.00 percent during 1Q23, and the Fed will likely keep those rates steady, going forward. If inflation does not decline substantially, the Fed may need to maintain those rates longer than expected. However, if inflation declines markedly and the US economy slips into a steep recession, the US central bank may cut its policy rates during the second half of 2023.