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1 Nov 2022

Econ Digest

FOMC meeting on November 1-2, 2022, the Fed is expected to raise its policy rate by another 0.75% amid high inflationary pressures


        KResearch is of the view that the Federal Reserve (Fed) will raise its policy rate by another 0.75% at the upcoming Federal Open Market Committee (FOMC) meeting, which will be the fourth consecutive 0.75% interest rate increase, while the Fed’s signal on monetary policy direction ahead should be monitored. Although the U.S. headline inflation rate seemed to have passed its peak in June, the core inflation rate in September continues to accelerate to a 40-year high at 6.6%. Meanwhile, the Core Personal Consumption Expenditures (Core PCE) Price Index that the Fed pays attention to, continues to accelerate in September as well, suggesting that inflationary pressures remain high even as energy prices, particularly oil prices, have declined. The U.S. labor market continues to reflect tight conditions with the unemployment rate reversing to decline to 3.5% in September, while the employment situation is considered to remain robust despite beginning to show signs of a slowdown.

        The market’s focus for this upcoming meeting will be on the signaling of the Fed’s future monetary policy direction. KResearch views that the Fed will reduce the scale of interest rate hikes going forward amid a slowing U.S economy, which will depend largely on inflation and employment data. If the U.S. inflation rate weakens in the face of a slowing U.S. economy and labor market, the necessity for the Fed to raise its policy rate by 0.75% will be reduced, prompting the Fed to raise rates at a slower pace of 0.25-0.50% at its next meeting in December and meetings scheduled early next year. According to the CME’s FedWatch tool, markets expect the Fed’s policy rate to reach the peak of 4.75-5.00% in 1Q2023 and that the Fed is likely to keep its policy rate steady at such level in the future. However, if inflation is not significantly reduced, the Fed may need to keep a high policy rate for longer than expected, but if inflation is reduced significantly and the U.S. economy faces a significant recession, the Fed may cut its policy rate in the second half of next year.

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Econ Digest