US | Fed will deliver a third 75bp hike and back up hawkishness with updated projections

Summary

The Summary of Economic Projections (SEP) will point to less confidence in the soft-landing outcome and a challenging road to bring back inflation to below 3.0% levels as the Fed “keeps at it until the job is done”.

Key points

• Key points:
• Powell’s keynote speech at Jackson Hole was his most hawkish message to date and buried expectations that the Fed might start to cut rates early in 2023 if the economy fell into a recession as interest rates rise to levels that restrain growth.
• Persistent core inflation coupled with a resilient economy give the Fed “flexibility to be aggressive” against inflation. The Fed will deliver the third super-sized rate hike and might signal that a fourth one might still be in the cards for November.
• The SEP update will point to more hawkishness, less confidence on the odds of a soft landing, and continued confidence that inflation will likely return to target in 2024 but will also likely stay at uncomfortably high levels throughout 2023.
• To back up hawkishness and avoid an unwanted easing of financial conditions, the 2023 year-end projection for the fed funds rate will probably be slightly above this year’s.

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