DBG-Fed hawks: "There will be another rate hike this year"

September 26 - Federal Reserve hawk Kashkari said that there will be another interest rate hike this year. The Federal Reserve last week expected the policy rate to be at least 5.1% by the end of 2024, but interest rate futures contracts reflected a drop to 4.65%. British media analysis said that traders began to question Chairperson Powell's statement.

Federal Reserve eagle Neel Kashkari said on Tuesday (September 26) that there will be another interest rate hike this year. He said there is more work to be done to tackle service sector inflation and is confident that the Federal Reserve can definitely return inflation to 2%. The Federal Reserve last week expected the policy rate to be at least 5.1% by the end of 2024, but interest rate futures contracts reflected a decline to 4.65%. British media analysis pointed out that traders began to question the "long-term higher" vision of Federal Reserve Chairperson Powell.

Mr. Kashkari said: "I am one of the Fed policymakers who expects another rate hike this year and US rates may need to move slightly higher and stay there longer to cool things down. Lower inflation next year may justify a lower federal funds rate to stop tightening. Balance sheet erosion will continue for the foreseeable future. The full impact of balance sheet run-off may not yet be felt."

"If the shutdown means we don't have access to the usual data, we will supplement it with the best private data," he stressed. President Joe Biden and his top advisers warned on Monday that a federal government shutdown could lead to widespread hardship, including the loss of food benefits to nearly 7 million low-income women and children.

The dollar index saw fresh gains on the comments and is currently trading at 106.01, slightly unchanged in Asian trading on Tuesday.

Forecasts released by the Federal Reserve's FOMC last week showed that most policymakers expect the central bank's benchmark overnight interest rate to remain at 5.6 per cent this year, implying another rate rise over the next three months. They also now expect the policy rate to be at least 5.1 per cent by the end of 2024, half a percentage point higher than forecast three months ago.

Meanwhile, interest rate futures contracts continue to reflect only about a 50% chance of further tightening in 2023, with the policy rate reaching 4.65% by the end of next year.

According to a Reuters analysis, such disagreements over policy trajectories, while not uncommon, could complicate the Federal Reserve's efforts to contain inflation if accommodative financial conditions stimulate spending or investment, which could reignite price pressures.

Inflation in the Fed's preferred gauge, the Personal Consumption Expenditures Price Index (PCE), peaked at 7% in the summer of 2022 and fell to 3.3% in July this year. With non-housing services inflation still sticky, Fed officials expect underlying inflationary pressures to ease slowly thereafter. Financial marekts may be more optimistic about easing price pressures than more cautious Fed policymakers.

Preston Caldwell, chief US economist at Morningstar, said: "We continue to expect the pace of Fed funds rate cuts to be faster than the Fed currently expects because we expect the pace of inflation decline to accelerate." He predicted PCE inflation would fall to 1.9 per cent by the end of next year.

Fed policymakers plan to stop raising interest rates once they are convinced inflation will fall to the central bank's 2 per cent target, and Mr. Powell said last week: "We don't have confidence in that yet."

They also plan to start cutting interest rates before inflation actually hits their target, to prevent policy from becoming too restrictive if inflation falls. The Fed's latest quarterly forecasts suggest that they now believe higher inflation-adjusted "real" interest rates are needed to sufficiently rein in the economy and win the inflation war.

DBG ForexDue to the high degree of uncertainty in forecasts, it is not surprising that traders and economists have also expressed skepticism.

"We expect real rates to be flat in 2024," wrote Morgan Stanley analysts, who expect the Fed to stop raising rates in 2023 and cut rates by a full percentage point next year.

"Every time the market has been wrong to doubt the resolve of the Fed, it has finally had to accept the Fed's position. Of course, this time is different, the Fed itself admits, basically at the end of the rate hike. Next year's trend will almost certainly decline, but the market misjudged the pace of the rise, and it remains to be seen whether the decline will proceed smoothly," ReutersSummarized.