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United States Monetary Policy September 2023

United States: Fed keeps rates unchanged in September, but signals further hike ahead

At the meeting on 19–20 September, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate at 5.25%–5.50%.

The decision was driven by the desire to assess the impact of past rate hikes, which total 525 basis points since early 2022. Moreover, despite the uptick in August, inflation has come down sharply so far this year, reducing the urgency to continue hiking.

The Fed’s own projections are for a 25 basis-point hike by end-2023, and for rates to remain above 5% through end-2024. The end-2023 projection is unchanged from the Fed’s previous forecast round in June, though the Fed now sees significantly higher rates in 2024 than was previously the case. For now, our panelists are somewhat more dovish than the Fed: many see rates unchanged through end-2023, and our Consensus is for rates to dip back below 5% in 2024.

Commenting on the outlook, Nomura analysts said:

“We maintain our view that July was the last hike of the current tightening cycle (Fig. 1). In our base case of a Q4 recession, this would likely not be a difficult decision. Even in a soft landing scenario, we would expect slowing inflation and ongoing moderation in the labor market to make any additional rate hikes a close call.”

However, United Overseas Bank’s Alvin Liew was more hawkish:

“We now expect the Fed to hike one final time by 25-bps in the Nov 2023 FOMC and pause thereafter. This means, with the FFTR currently at 5.25-5.50%, we are adjusting our terminal FFTR level higher to 5.50-5.75%, which unsurprisingly is forecast to last through 2023.”

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