La Française: Pre-Fed commentary

June 15, 2022

By François Rimeu, Senior Strategist, La Française AM

“A lot of work to accomplish” to meet the FED’s 2% objective. The FED is under (political) pressure!

As widely expected, the Federal Open Market Committee (FOMC) will hike rates by 50 basis points (bps) at its June 14-15 meeting for the second time in a row. The Federal reserve will update its Summary of Economic Projections (SEP) that will most probably indicate lower growth and higher inflation. They will also publish the new “dot plot”, which should indicate a more aggressive hiking path.

Please find below what we expect:

• The FOMC will most likely raise the federal funds target range to 1.25%-1.50%.
• Chairman Jerome Powell will reaffirm a similar-sized hike for July, and we think it will continue to be the case until the committee sees convincing evidence that inflation is slowing down. In the case of continued upside surprises on the inflation front, we believe Chairman Powell will not exclude a 75 pbs increase going forward.
• We expect the median dot for this year to show upward revisions to 2,875% which reflect 50 bps in July and September followed by continued 25 pbs rate hikes through the end of the year. We expect three additional hikes (25 pb moves) next year to 3.625%.  For 2024, we expect to see the median dot to remain unchanged at 3.625%. We do not believe the 2024 median dot will show rate cuts despite a few participants forecasting cuts. We do not expect change on the terminal rate at 2.5%.
• On the new economic projections, we expect them to indicate lower growth in 2022, from 2.8% to 2.3%. We also expect growth projections to decrease from 2.2% to 1.8% in 2023 and from 2.0% to 1.9% in 2024. We anticipate the committee to revise its forecast for higher inflation figures (Personal Consumption Expenditure, PCE) with projections moving up from 4.3% to 5.4% in 2022 and from 2.7% to 2.9% in 2023. We do not anticipate the 2024 inflation figure to be revised.

Fed Chairman Powell must adopt a more hawkish stance, especially after last week inflation figures. He is expected to reaffirm that the number one priority for the FOMC is to slow inflation, and that the FED will act accordingly, and more vigorously if needed. We expect the US curve to flatten again; considering the current situation, we would not be surprised to see the US curve invert meaningfully in the coming months. We also expect real rates to continue rising.