US: FOMC hikes rates and removes the forward guidance – UOB

UOB Group’s Senior Economist Alvin Liew and Rates Strategist Victor Yong comment on the latest FOMC event (July 27).

Key Takeaways

“The US Federal Reserve (Fed) unanimously agreed to accelerate its rate hike cycle in the 26/27 Jul 2022 FOMC by lifting the policy Fed Funds Target rate (FFTR) by another 75bps to 2.25-2.50%, and it anticipates that ongoing rate hikes will be appropriate with its continued focus on reining in inflation.”

“During his post-decision press conference, while FOMC Chair Powell said another “unusually large” increase could be appropriate at next [Sep] meeting, he added that it will be appropriate to slow pace of increases as rates get more restrictive. Importantly, Powell declined to give explicit forward guidance for Sep FOMC and said it will be based on incoming data and it is “time to go to meeting by meeting basis.” Powell did not think the US economy is in recession as too many areas of the economy are performing well and job growth, wage measures are strong which are not consistent with a recession. That said, he noted it is very hard to say with any confidence what the economy will be like in 6-12 months.”

“FOMC Outlook – Expecting 50bps Rate Hikes In Sep And Nov, 25bps In Dec FOMC: Expectations remain firm for the Fed to continue with its rate hikes in 2022 but the path has become more uncertain, given the shift to ‘meeting by meeting’ basis. We now expect another two more 50 bps rate hikes in Sep and Nov FOMC before ending the year with a 25bps hike in Dec. Including the rate hikes of 25bps in Mar, 50bps in May and the latest 75bps in Jun and Jul, this implies a cumulative 350bps of increases in 2022, bringing the FFTR higher to the range of 3.50-3.75% by end of 2022, a range largely viewed as well above the neutral stance (which is seen as 2.25-2.50%, the Fed’s long run projection of FFTR). We maintain our forecast for one further 25bps in 1Q 2023 (from previous forecast of two more 25bps rate hikes), bringing our terminal FFTR to 3.75-4.00% by end 1Q-2023, and a pause to the current rate hike cycle.”

“Rates Outlook: Guided by our relatively hawkish policy rates outlook, our forecasts for short term interest rates are similarly poised to head higher into the first half of 2023. We see the 3-month compounded SOFR and SORA at 3.30% and 2.60% respectively by end 2022.”

“In our view, the gathering of dark clouds is likely to persist going forward. As such, longer maturity yields will continue to handicap the possibility of recession. For developed markets, this will translate to a more modest potential for yield upside than otherwise. We see 10-year UST and SGS yields at 3.60% and 3.20% respectively, by end 2022.”