After the Fed rate hike, the market expects growth of up to 5% in the 1st quarter

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Kirill Kononov, Otkritie Bank 04 November 2022 12:14

On November 2, the Fed expectedly raised the rate from 3.25% to 4% – the regulator has already raised it by 75 bps for the fourth time, generally following the trajectory of its own rate hike forecast formed a few months ago. At a press conference, J. Powell said the rate cap next year is likely to be higher than previous expectations. Previously, the Fed board of directors believed that in 2023 the rate would reach 4.5%.

However, in September-October, core PCE inflation – the Fed's main benchmark – rose to 5-5.2% YoY, the last time this level was reached in February-March. Overall PCE inflation continued to slow from 6.8% YoY in June to 6.3% in September, which is significantly higher than the Fed's 2% target. As a result of rising prices for goods, the demand of American consumers has shifted to services, especially medical services. A significant part of them is subsidized by the government under the Medicare-Medicaid insurance programs. Therefore, an increase in demand for them leads to a disproportionately high price increase, which accelerates the overall inflation rate.

In addition to high inflation, Powell's statements were probably influenced by the high workload of the labor market. Unemployment remains near a historic low of 3.5%, and open vacancies remain near multi–year highs. At a press conference, Powell repeated the position formulated at previous meetings: raising the rate increases the likelihood of a recession in the economy, but the Fed is ready to go for it, since the target indicator for it is inflation.

The market perceived Powell's speech as a willingness to raise the Fed rate to 5% in the first quarter of 2023. Futures for the Fed rate for the 2nd quarter of 2023 shifted from 5% to 5.25%. Stock index quotes and bond curves have changed in proportion to expectations of a rate hike.

It is likely that in the coming months, the Fed's plans to raise the rate will be actively reviewed following changes in current inflation levels.