Fed : interest rate peak in sight

By Volker Schmidt, Senior Portfolio Manager at Ethenea

The US Federal Reserve (Fed) will leave its key rate unchanged at its next meeting on 1 November, as did the ECB. This is not only our view but also the current consensus among market participants.

At the last press conference on 20 September, Fed Chairman Jerome Powell used the word "cautious" no less than six times in connection with future central bank policy. The reasons for this cautious approach, officially described as "data-dependent", are clear: firstly, changes in monetary policy have long and variable lags, and secondly, progress has already been made in stifling inflation. Last but not least, rising yields at the long end of the yield curve are helping. For example, the yield on ten-year US Treasuries has risen by more than 50 basis points since the Fed's September meeting. According to various Fed officials in recent weeks, this gives the central bank more time to assess incoming data before considering another rate hike. Only if "demand and economic activity continue at their recent pace, possibly putting persistent upward pressure on inflation" even Governor Waller, one of the Fed's most hawkish members, would consider another rate hike. He too is leaning towards a pause at the November meeting.

Indeed, US consumption is showing signs of strength: retail and labour market data have been surprisingly strong. The GDP forecast for the third quarter has also been revised upwards several times. At the same time, however, there are writings on the wall for US consumers. In addition to rising credit card defaults and delinquencies on subprime auto loans, sharply declining mortgage applications point to a near-term decline in demand and thus a slowdown in inflation.

For these reasons, our forecast does not call for a rate hike in November, although we do not rule out a hike in December.

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