Will the Fed manage to temper rate hike expectations?

It will likely be in the beginning of December, and with asset purchases expected to be wound down entirely by the middle of 2022. Given the timing of this month’s meeting – just before Friday’s October jobs data – we had previously thought there was a risk that the Fed might delay an announcement until next month. However, the evidence since the last meeting in September further confirms that the recent weak jobs growth has been mostly due to a lack of available or appropriately skilled staff, rather than a lack of demand on the part of employers. As such, even a weak November jobs number would have been unlikely to challenge the decision to begin tightening monetary policy.

Fed will seek to push back on rate hike expectations – but how aggressively? The key question going into this meeting will be to what extent the Fed pushes back against market pricing, which now suggests the Fed will begin raising rates by the middle of 2022. Previously, market pricing pointed to rate hikes starting in late 2022, while markets now price at least two hikes before the end of next year. While worsening supply-chain bottlenecks and stubbornly strong goods consumption in the US have raised the risk of more persistent elevated inflation, and uncertainty is high, we continue to think there is a high bar for the Fed to row back on its signalling that the end of asset purchases would not be immediately followed by rate hikes. As such, Chair Powell will likely push back against the recent shift in market expectations. However, just as ECB President Lagarde demonstrated last week, it might be difficult to do this with credibility at this stage, with markets likely awaiting a convincing turn-around in inflation dynamics before rate hike expectations unwind. This is not likely in the near term – if anything, we expect a reacceleration in monthly inflation in the US over the coming months, with price growth cooling again in the first half of 2022. Consistent with this, we continue to expect the Fed to look through the current elevated inflation, and to begin hiking in early 2023. (Bill Diviney)