The Fed will raise rates even higher after September’s inflation data

  • Barclays said on Thursday it now expects “more aggressive, forward-looking hikes from the Fed” after September’s CPI.
  • It predicts the Fed will raise interest rates by 75 basis points in December and by 50 basis points in February 2023.
  • He also sees the central bank starting to cut interest rates later next year.

The Federal Reserve could raise its key interest rate to 5% in 2023, Barclays said on Thursday, as a hotter-than-expected September inflation report prompted it to revise its forecast for policy moves central bank.

“We now expect more aggressive, front-loading hikes from the Fed in the coming meetings,” Jonathan Millar, senior economist at Barclays, said in a note.

Barclays now expects policymakers to raise the Fed Funds rate by 75 basis points in December, compared to its previous view of a 50 basis point increase.

For the first meeting in 2023, Barclays is forecasting a rate hike of 50 basis points, up from its previous forecast of 25 basis points. She backed her view that in November the Federal Open Market Committee chaired by Jerome Powell will raise interest rates by three-quarters of a percentage point.

Overall, this would push the Fed Funds rate to a range of 5% to 5.25% in February. Barclays had earlier forecast a range of 4.5% to 4.75%.

The Bureau of Labor Statistics on Thursday reported that the core consumer price index – a measure of inflation excluding volatile food and energy prices – rose 6.6% in the year to September, the fastest price increase since 1982. Expectations it was 6.5% among economists polled by Bloomberg.

“Surprises in core services were broad-based, reflecting solid prints in both shelter component rental … and ex-shelter services of 0.9% month-on-month,” Millar said. He noted that the Owners Equivalent Rent and primary residence rent gauges accelerated to 0.8% each month.

“Therefore, the latest estimates point to a broad-based acceleration in the services sector, which is clearly inconsistent with the FOMC’s determination to continue with aggressive hikes until it sees ‘clear and convincing evidence’ of a sustained reduction in inflationary pressures,” he said. Millar.

Following September’s inflation report, investors believe the odds of a 75 basis point rate hike at the Fed’s December meeting have doubled.

“With the FOMC’s backward-looking reaction function intensifying the risks of excessive tightening, we now expect the FOMC to cut the funds rate by 75bp over the final three meetings of 2023,” Barclays said. Such moves would bring the Fed Funds target range to 4.25% to 4.5% at the end of next year, compared with the investment bank’s previous forecast of 4%-4.25%.

The Fed is expected on Nov. 1-2 to make its fourth consecutive 75 basis point rate hike and the sixth hike in 2022. The benchmark rate was set at 3%-3.25% after starting at zero this year.

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