Fed Preview: Forecasts from 16 major banks, fast pace hiking cycle continues

The US Federal Reserve will announce its monetary policy decision on Wednesday, September 21 at 18:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 16 major banks. 

The Fed is set to raise rates by 75 basis points for the third time. Investors will pay close attention to terminal rate projection in dot plot. Fed Chair Powell's willingness to accept a recession is also critical.

TDS

“We expect the FOMC to deliver another large 75 bps rate increase, lifting the target range for the Fed Funds rate to 3.00%-3.25%. In doing so, the Committee would bring the policy stance above its estimate of the longer-run neutral level. We also look for the FOMC to provide more hawkish signals through the update of its economic projections, and for Chair Powell to build on his message from Jackson Hole. Tempting to buy the rumor/sell the fact for the USD, we prefer to be neutral. While the curve has aggressively repriced terminal, there is risk that Powell could channel Volcker on messaging. Over the balance of the year, we still see more USD strength.”

NAB

“We still expect that Fed will raise Fed funds rate by 75 bps. However, we have revised higher our expectation for the peak fed funds rate for this cycle – we now expect a target range of 4.00-4.25% (3.50-3.75% previously) by early 2023.”

Swedbank

“We expect that the Fed will hike the federal funds rate by another 75 bps in September, before lowering the pace to 25 bps in November and December, as the interest rate goes into restrictive territory. This would leave the terminal rate at 3.50-3.75% by the end of this year. The Fed will also ramp up their quantitative tightening in September, by letting up to USD95 bn roll of the balance sheet every month. We then expect the Fed to be on hold during next year, trying to manage a fine balance between curbing inflation and not harming the real economy too much.”

Danske Bank

“We expect Fed to hike 75 bps next week – the market is more upbeat and see a possibility of a 100 bps hike.  Recent inflation data does not warrant such a large hike, and the fact that real yields are rising and financial conditions have tightened implies Fed's hawkish post-Jackson Hole communication is working as intended. While we keep our call of the third consecutive 75 bps hike, we also find a chance of a fourth 75 bps hike in November, and potentially a fifth 75 bps hike in December, and a terminal rate well above 4% next year likely.”

Commerzbank

“The Fed is expected to make another big rate move at next week's meeting, the third ‘75er’ in a row. The currency market is already expecting a strong interest rate step on the part of the Fed, which is why the dollar should benefit only slightly from 75 bps. The Fed would already have to surprise the currency market with a stronger move and presumably also signal that the key interest rate could still rise above 4% for the dollar to get another additional boost.”

Westpac

“A 75 bps hike seems a done deal. Indeed, the market is pricing some chance of a 100 bps increase. To us, at this point in the cycle and with real-term interest rates around +1.0%, a 100 bps increase is unnecessary and potentially risky. Also, note that an additional 100 bps of hikes is forecast for the remainder of the year; the market sees the risk of more. Critical to assessing the outlook for policy beyond September will be the FOMC’s updated forecasts for inflation, growth and the fed funds rate in 2023 and 2024. We see big risks for growth into the medium-term; but if the FOMC is more sanguine, market pricing could turn more hawkish.” 

Nordea

“We look for the Fed to hike its Fed Funds Target Range by 75 bps. We have updated our rates forecast, bringing forward some interest rate hikes from next year. We expect rates to go above neutral and into restrictive territory by early next year and to stay there for as long as it takes to get the job done on inflation. Our take is that this will require a long long period of high rates and we see slim chances of a Fed pivot anytime soon.” 

ING

“A 75 bps hike is still our favoured call, but we acknowledge the risk that with inflation proving to be stickier than we had suspected, the subsequent meetings in November and December could see more aggressive action from the Fed than we are currently pencilling in. While the geopolitical backdrop, the China slowdown story, the potential for energy rationing in Europe, the strong dollar and fragile-looking domestic equity and housing markets argue for a more moderate path of tightening in the coming months, if inflation momentum doesn’t slow the bank will hike by a further 75 bps in November and possibly 50 bps in December. The message from the Fed is likely to emphasise data dependency, but its updated economic forecasts are likely to show the end-2022 Fed funds rate at 4.125% rather than 3.4% (July forecast) and we suspect it will be kept at that for 2023, before dropping back to a long-term average rate of 2.5%.”

SocGen

“We expect a third 75 bps rate hike. There has been some talk of 100 bps, but Fed officials pushed back on that option earlier and we do not expect them to take it now.”

Rabobank

“We expect the FOMC to raise the target range for the federal funds rate by 75 bps to 3.00-3.25%. Next year we expect the top of the target range to peak at 5.00% and we do not expect the Fed to pivot before 2024. The main reason why we remain above consensus in our forecasts for the Fed and money market rates is that we think that a wage-price spiral has started that will keep inflation persistent. With the Fed clearly prioritizing price stability over full employment, this is going to push the FOMC higher than they currently anticipate.”

NBF

“The FOMC is set to increase the fed funds target by 75 bps for the third consecutive meeting. With inflation still hot and the labour market remaining tight, the Fed is likely to signal that further rate increases will be necessary. On that note, we’re set to receive a new Summary of Economic Projections and ‘dot plot’ which will give us fresh insight into the FOMC’s expected policy rate trajectory. In all likelihood, the median 2022 ‘dot’ will be pushed higher, towards 4%. Consistent with recent Fed rhetoric, it’s unlikely they’ll be signalling rate cuts until at least 2024. Just as interesting will be the FOMC’s economic projections. June’s SEPs were consistent with a very soft landing but Powell’s Jackson Hole comments conceded that ‘pain’ may be coming for households and businesses, so there should be a material downgrade coming. As usual, there will be a Jerome Powell press conference after the meeting which should provide marginal guidance on the path of interest rates going forward.”

ANZ

“We expect the Fed to hike the target range by 75 bps and to re-emphasise its overtly hawkish guidance. We also expect that the tightening cycle will extend through the first half of 2023 and have raised our terminal FFR to 5.0%, up from 4.0% previously. The FOMC’s economic projections should shift notably from June given Fed rhetoric of a sustained period of below-trend growth being needed. We expect notable downgrades to GDP resulting in a higher unemployment track. The dot plot should be steeper and higher compared to June.”

CIBC

“After the fire and brimstone of the past week’s core CPI data, the least the Fed can do is raise rates another 75 bps to a ceiling of 3.25% and pledge that more is coming. The case could easily be made for 100 bps. Nobody on the FOMC really believes that rates won’t get to 3.5% at some point, and the Fed could take the shock out of such a move by explaining that it’s only about getting rates to the required level sooner, just as the Bank of Canada did after its 100 bps move. But the fact that the Fed declined to do 100 bps when rates were at a much lower level suggests that it’s probably not on the drawing board now.”

Citibank

“We expect the Fed to hike by another 75 bps to bring the cash rate to 3.00-3.25%. More important will be the Fed dot plot and economic projections and there remains a hawkish risk that median expectations for the fed funds rate in the Summary of Economic Projections increase significantly from their June values and that median dots rise to 4.0-4.25% for 2022 and around 4.5% in 2023. In the press conference, consensus expects Chair Powell to sound similar to his speech at Jackson Hole.”

Wells Fargo

“We look for another 75 bps rate hike. An update to the FOMC's Summary of Economic Projections (SEP) will also be provided. We expect the 2022 median projection for the federal funds rate to be 3.875%, up from 3.375% in the June SEP. Despite the hawkish rhetoric, few Fed officials have advocated for a peak federal funds rate that is well above 4%. Our expectation is that the median projection for the 2023 fed funds rate will be 4.125%. For 2024 and 2025, we think the dots will show a steady easing of policy as inflation moves back to 2%. Weaker GDP growth and higher unemployment projections for 2023 also seem likely In terms of the post-meeting press conference, we anticipate Chair Powell's comments to mirror his speech at Jackson Hole in which he made clear that the Federal Reserve views its fight against inflation as far from finished.”

OCBC

“We expect the Fed to hike its Fed funds rate by 75 bps, which will bring it to 3.00-3.25%.”