Written by Sonia Meskin, Head of US Macro, BNY Mellon Investment Management
The Federal Reserve Open Market Committee (FOMC) is widely expected to raise its target rate by another 75 basis points today, and this is also our forecast. While another 75-basis-point hike for November is ‘baked in’, the real question for investors is the trajectory of policy going forward, as well as the terminal rate.
We believe there is a 50% chance that the Fed will hike by another 75 bps in December, and a 50% chance they will hike by 50 bps in December. Either way, both the Committee’s and our forecasts suggest the policy rate will stabilise between 4.5-5.0% early in 2023, though persistently high inflation is a notable upside risk to this forecast.
Our central expectation is that the US policy would need to tighten from here, even in the face of a global recession, in order for the Fed to get inflation down to its 2% objective. However, as we move closer to year-end, we may see encouraging signs of labour market cooling even if this means we are entering a recession.
Recent US job opening numbers and some regional surveys point to nascent signs of slowing labour demand, and US business surveys indicate slowing activity, lower housing and commercial real estate prices, and declining consumer confidence. Elsewhere, Europe is on the cusp of a recession, and the persistent USD strength risks exacerbating global financial vulnerabilities.
On the other hand, despite 325 bps of tightening thus far in 2022, US personal consumption and employment have remained strong by historical standards. Moreover, households have continued to spend despite a lower fiscal impulse in 2022 relative to 2021.
The outlook for 2023 US real income growth is decent, especially if energy prices stabilise, and states and municipalities deliver tax relief thanks to their own improved balance sheets. This strength, however, has reinforced domestic inflationary pressures, and we are seeing that inflation remains an overarching concern for the FOMC.