Reuters poll hints at another 75 bps rate hike by the Fed in November

The most recent poll by Reuters is hinting at another 75 bps rate hike by the US federal Reserve when it concludes the next FOMC meeting on 02nd November. Economists have hinted that the Fed is unlikely to pause on rate hikes until the inflation falls to at least half the current levels. That would take a little longer, but this may also be the last 75 bps rate hike and markets expect the Fed to hike rates by either 25 bps or 50 bps in the December meet and then take a pause and review in the year 2023. For now, the direction is clear and a 75 bps rate hike almost looks a fait accompli in the Fed statement on 02nd November.

It is not just the economist poll, but the most market friendly measure of the CME Fedwatch is also hinting at a high probability of a 75 bps rate hike in November. The CME Fedwatch considers implied probabilities contained in the Fed Futures trading to arrive at the probability of rate hikes. According to the latest CME Fedwatch update, the probability of a 75 bps rate hike in November is as high as 95%, and you can almost call it a certainty. In fact, the CME Fedwatch has also assigned a 54% probability to a 75 bps rate hike in December and a 45% probability to a 50 bps rate hike in December. So, it sure appears very hawkish.

Here are some key takeaways from the latest Reuters poll on expected Fed rate hike in the 02nd November Fed statement.

    a) The Reuters poll assigns a very high probability of up to 70% to a 75 bps rate hike in the November FOMC meet. In fact, economists don’t see the Fed really pausing till the consumer falls to about half the current levels.

    b) However, not all is hunky dory as per the Reuters survey. The respondents have also pegged the probability of recession in the next 12 months at a high level of 65% and it is up nearly 20 percentage points since the last poll.

    c) The consensus view of economists in the poll is that notwithstanding recession concerns, the Fed members would be driven more by the high levels of inflation and the very strong signals coming from the jobs data. That will drive the rate hikes.

    d) The consensus view of the economists in the Reuters Poll was that the hawkishness of the Fed was targeted at bringing real rates to positive levels by the end of 2023 and the Fed hawkishness would mean that it would be bang on target.

    e) However, the broad view is also that the front loading should be done and dusted by December and after that rate hikes should only happen on a (if required) basis. At worst rate hikes in 2023 may be grinding, at best there may be rate cuts, but likely stagnant.

    f) The consensus view is that while the Fed rates should technically peak around 4.75%, the upside risks are more than the downside risk. That means, there is a distinct possibility that the terminal rate may go beyond 5% Fed funds rate.

    g) Consumer inflation in the US is expected to average 8.1% in 2022, 3.9% in 2023 and 2.5% in 2024. So the official pause may come in the second half of 2023, although rate cuts may only happen probably in the year 2024 or beyond.

    h) Apart from inflation and growth, a key metrics would be the unemployment rate, which is expected to close at 3.7% this year but spike to 4.4% in 2023 and to 4.8% in 2024. That may be the first signal that rate hikes may have peaked out.