US: FOMC signals a potential higher terminal rate – UOB

UOB Group’s Senior Economist Alvin Liew and Rates Strategist Victor Yong comment on the latest FOMC event.

Key Takeaways

“The US Federal Reserve (Fed) in its 01/02 Nov 2022 FOMC, as widely expected, accelerated its rate hike cycle by lifting the policy Fed Funds Target rate (FFTR) by a fourth consecutive 75bps hike to 3.75-4.00% (unanimous decision).”

“FOMC Chair Powell signalled clearly that the Fed is far from done and there will be more rate hikes ahead (‘We still have some ways to go’). Powell continued to see risks to inflation as weighted to the upside and he stressed the Fed’s determination to bring inflation down to the Fed’s 2% objective, that ‘there is still a need for ongoing rate increases, ground left to cover, and cover it we will…We want to be sure we don't make mistake of not tightening enough or loosening too soon’. He warned that based on data, the terminal FFTR will be higher than previously expected but also said it could be appropriate to slow the pace of increase ‘as soon as the next meeting or the one after that’.”

FOMC Outlook – Chair Powell’s determination to rein in inflation remains undisputed but his latest comments gave us a combination of a more hawkish trajectory (in the form of a higher terminal rate) and the possibility of smaller rate hikes as soon as the Dec FOMC. As such, we keep our existing forecast for a 50bps hike in Dec. For 2023, we revise our forecast as we now expect two more 25bps rate hikes, one in Feb 2023 FOMC and another in Mar 2023 FOMC, bringing our terminal FFTR forecast higher to 4.75-5.00% by end 1Q-2023 (from previous forecast of 4.50-4.75%), and a pause to the current rate hike cycle until 1Q 2024.