As early as today, i.e. November 2, 2022, the U.S. Federal Reserve may decide to raise interest rates by 75 bps for the fourth consecutive year. The current range for the federal funds rate is 3.00-3.25, while the market's expectation is 3.75-4.00 percent. Will this be the last such significant hike in this cycle?
Federal Reserve system
The Federal Open Market Committee (FOMC) may decide to continue its unprecedented pace of interest rate hikes in early November to combat the highest US inflation in decades. In addition, core inflation seems to have risen faster recently (6.6 percent in September, the highest since 1982), hence a fourth consecutive hike may already be discounted by the market. Moreover, despite previous hikes, the U.S. economy has returned to economic growth, as shown by the latest GDP data (2.6 percent for the third quarter). In addition, job creation in the U.S. economy appears to be maintaining its post-pandemic pace, which may also convince the Fed to continue tightening monetary policy. The Fed may still believe that inflationary risks are directed more upward, and that continued rate hikes are appropriate and that a sustained period of below-trend growth is required to bring inflation under control.
What could be the surprise for the USD exchange rate?
It seems to be a little chance of a dovish surprise at this point. A few analysts are predicting a 50bp hike, a view that has gained some traction after recent comments by several FOMC members about the risk of over-tightening policy and triggering an unnecessarily deep recession, reports ING in its note. However, it is generally considered a theme regarding the size of rate hikes at future meetings. Nevertheless, it has certainly dampened any talk of a 100bp rate hike. No analyst is forecasting such an outcome based on survey consensus, unlike at recent meetings, according to an ING release.
Source: Conotoxia MT5, EURUSD, Daily
However, if it turned out that the Fed would follow in the footsteps of the Bank of Canada and raise interest rates by 50 bps, the reaction in the dollar market could be significant. Nonetheless, the US central bank could then focus more on reducing its balance sheet, which in turn could be difficult to do, due to possible liquidity problems. However, it seems that as long as more hikes are expected, which the market is still pricing in, unless month-on-month core inflation starts to fall sharply, the dollar could meet demand again in the event of any weakness. After all, the Fed seems still struggling with core inflation, which is moving away from year-end targets, and the central bank's goal may be to achieve positive real interest rates in 2023 (the Fed rate may outpace inflation).
Source: Conotoxia MT5, USDIndex, Daily
When will the Fed publish its decision?
Due to the time change in Europe, but still no time change in the US, the Fed's decision will be published at 19:00 (GMT+1). The post-meeting press conference is scheduled to begin at 7:30 p.m. This is when Jerome Powell will be able to give an overview of the situation in the U.S. economy, and perhaps we will learn what further steps the Fed intends to take.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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