This from analysts at Moody's on the Federal Open Market Committee (FOMC) meeting this week, and what lies beyond.
- The August U.S. consumer price index changes the calculus for the Federal Reserve, which is now likely to hike the target range for the fed funds rate by 75 basis points
- Financial markets are fully pricing in a 75-basis point rate hike this month and put the odds of a 100-basis point hike at 25%.
- It’s fairly clear that the Fed is going to front-load rate hikes more than in our September baseline and the terminal rate, or the peak for the fed funds rate this cycle, will also be higher. The upcoming baseline forecast is going to factor in a 50-basis point rate hike in November (previously 25 basis points) and maintain a 25-basis point hike in December. This would imply that the target range for the fed funds rate will likely be near 4% to 4.25%.
Moody's concludes on this pessimistic note. Its hard for me to disagree with them:
- All told, there is a material risk that inflation remains higher for longer since traditional monetary policy tightening is not equipped to address the supply shocks pushing inflation higher in the U.S. The Fed could be faced with a Hobson’s choice: Push the economy into a mild recession, as in one of our scenarios, to tame inflation, or wait and cause a more significant recession, since a stagflation scenario is possible next year if the Fed is not aggressive enough.
- The Fed’s track record in tightening monetary policy without causing a recession is not great.
Good luck with that.
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