La Française: Key interest rates to remain unchanged

September 19, 2023

At this week’s meeting, the US Federal Reserve (Fed) will most likely leave key rates unchanged, as widely anticipated by the markets. However, this meeting could bring a lot of volatility to markets given the many uncertainties about the direction of the Fed’s future decisions.

Here is what we expect: 

• Policy rate to remain unchanged at 5.25%-5.50%.
• Consistency in the message delivered by Mr. Powell; he should repeat what he already said at the Jackson Hole conference: "the fight against inflation is far from over", the Fed "will keep at it until the job is done" and "restoring price stability will likely require an extended period of elevated interest rates".
• Even if the Fed is and remains "data dependent", we believe that Jerome Powell will start preparing the market for a potential rate increase before the end of the year due to economic growth which is still above its potential level (overheating), a job market that shows little sign of moderation and a barrel of oil that has risen sharply since June.
• Continued balance sheet reduction at a rate of $95bn per month.
• A "dot plot" that should continue to show an additional rate hike by the end of the year, even if the changes in voters make forecasts difficult. The "dots" for 2024 and 2025 should be unchanged and the "dot" for 2026, which appears for the first time, should be in line with the long term “dot”. With regards to the latter, it does not seem impossible to us that it will be revised upwards.
• Macroeconomic forecasts to evolve as follows:
  • Growth revised significantly upwards in 2023, from 1% to 2% but unchanged in 2024 and 2025. Growth in 2026 is expected to be close to potential growth at 1.8%. The 2023 unemployment rate is also expected to be revised slightly downwards from 4.1% to 3.9%.
  • A rate of inflation that should not be significantly revised.

In summary, we expect the Federal Reserve to keep a hawkish bias at this press conference and reiterate the message that rates will have to remain high for an extended period of time in order to bring inflation down to the 2% mandate. This meeting could therefore lead to higher rates and a moderate flattening of yield curves.