FAST FIVE: FOMC Preview: Watch For The Fed's Reaction Function To Both Labor And Inflation

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However, Chair Powell's press conference injected a hawkish bias after he suggested that it was “very premature” to consider pausing the course of hiking.

And after CPI and PPI data eased in October, money market pricing implies a 50bps rate hike in December, with the terminal rate expected to be a little over 5% by mid-2023 – it is worth noting that for most of last week, expectations of the terminal rate were sitting between 4.75-5.00% until FOMC voter Bullard delivered hawkish remarks, where he suggested that rates were not yet “sufficiently restrictive”, “even under the most generous interpretation”; Bullard has been a policy leader in the post-pandemic era, with his hawkishness coming before other colleagues.

Many officials – including Powell – have stressed the terminal rate, or where the Fed gets to, as being more important than how it gets there, nonetheless, the hike increment decides how fast we get there and gives clues to how close we are to the terminal.

The September SEPs ('Dot Plot') saw a peak rate of 4.50-4.75%, but it is likely that this will be revised higher in December so commentary in the minutes on participants' views of the terminal rate will be key.

Of course, how long the Fed needs to stay at the terminal rate is key as well, although that is inherently harder to forecast given the longer timeframe, participants are instead likely to suggest it will depend on how the economy evolves ('data dependence') and stress that the FOMC wants to see inflation clearly showing evidence it is returning back to its 2% target.

Categories: ZH