There will be rate hikes in the remainder of 2022

Fed focuses on fighting inflation, even if it costs US recession

AP/PATRICK SEMANSKY - Federal Reserve Building in Washington

The Federal Reserve admits that the chances of disinflation without a major cooling of the labour market are low.

Álvaro Sanmartín, partner and chief economist at AMCHOR IS, points out that the Fed wants to end 2022 with rates at 4.4%, and at 4.6% in 2023. "From then on, the Fed foresees a downward path for rates, below 3% in 2025 and tending towards 2.5% in the long term," he stresses.

"According to the Fed, such a rate path will lead to growth below potential, but without recession. But 4.6% seems excessive to me. I think raising rates to something closer to 4% and leaving them there for a sufficiently long period of time will be enough to moderate aggregate demand and start to reduce core inflation. I actually think that core inflation is going to start to fall soon (before the end of the year) and that will cause the Fed to raise rates a little less than it said today. As for the foreseeable evolution of activity, I am with the Fed: growth below potential, but no recession," he argues.

Silvia Dall'Angelo, senior economist at Federated Hermes Limited, points out that "the Fed's goal is to fight high inflation and reiterate a hawkish stance going forward". The Fed admits "now that some degree of pain will be needed to bring inflation down to target and that the odds of disinflation occurring without a major cooling of the labour market - so-called immaculate disinflation - are low".

"The policy rate is now expected to peak at 4.6% in late 2023 and to remain in tightening territory throughout the forecast horizon until the end of 2025, although the high dispersion of forecasts in 2024-2025 is indicative of greater uncertainty going forward. At the same time, the unemployment rate is now expected to rise to 4.4% in 2023-2024 from 3.8% at the end of this year, the kind of increase usually associated with a recession," she notes.


"The Fed has sounded determined once again to do whatever it takes to meet its inflation target. Powell avoided making explicit references to an impending recession, but he made it clear that the Fed is willing to tolerate below-trend growth and a weaker labour market while focusing on quelling inflation. It is true that monetary policy is operating with a lag and that the COVID recession may have left structural marks on the economy, so there is uncertainty about the degree of monetary tightening needed to bring inflation back to target without hurting the labour market too much. At this point, based on the balancing act it faces, the Fed is willing to take the risk of overshooting," concludes the Federated Hermes expert.

AXA IM forecasts rate hikes in November and December

David Page, Head of Macro Research at AXA Investment Managers, stresses that Powell talks about "a way to go" and about committing "until the job is done", in reference to price stability. "We expect hikes of 0.5% in November and December, to 4.25%, a little below the Fed's average. We expect no change in policy (either up or down) in 2023, even further below the Fed's outlook," he says.

"We also expect growth to contract more rapidly, we see upside risks to unemployment and we believe inflation will fall somewhat more slowly next year. Financial conditions tighten further," he adds.

He argues that the Fed will continue to raise rates as long as the labour market and underlying prices remain strong. "There is reason to expect September inflation to be softer after an abnormally strong August, and the labour market has started to soften (although timely initial jobless claims have fallen in the last month)," the AXA IM expert notes.

"We expect growth to contract year-on-year in the fourth quarter, below the Fed's forecast of 0.2%, and for the recession to last until mid-2023. Powell stated that the likelihood of a soft landing decreases the tighter policy becomes or the longer it remains tight," he adds.

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