Fed Preview: Forecasts from 18 major banks, downshift to 50 bps

The US Federal Reserve will announce its monetary policy decision on Wednesday, December 14 at 19:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 18 major banks. 

The Fed is widely expected to raise rates by 50 basis points (bps), slowing down its tightening pace. Meawhile, fresh forecasts are set to show a higher peak interest rate for 2023.

ANZ

“We expect the Fed to hike by 50 bps, taking the top end of the fed funds range to 4.5%. A modest step down from four successive 75 bps hikes. The FOMC is now actively seeking the terminal rate to achieve its inflation objective. We expect the median FOMC official projection for terminal to rise by 50 bps to 5.13% in 2023 relative to its September projection. With inflation proving sticky and the labour market buoyant, the risks to our 5.00% terminal view are to the topside.”

Danske Bank

“We acknowledge that our earlier call of a 75 bps hike appears unlikely, but do not think the need to tighten monetary policy further has disappeared. We adjust our Fed call, and now expect 50 bps hike this week, followed by 50 bps in February and 25 bps in March. Thus, we maintain our call for a terminal rate of 5.00-5.25% unchanged.”

Westpac

“Recent data have given the FOMC enough confidence in their tightening to date and the risks related to inflation to slow the pace of rate hikes from 75 bps to 50 bps at the December meeting. A further moderation is likely to come at the January/February meeting, to 25 bps per move. That said, the rhetoric from Chair Powell at the post-meeting press conference and the overall tone of the Committee’s forecasts will remain hawkish, with the FOMC committed to doing what is necessary to bring inflation back to target without delay. With financial conditions having eased materially and nonfarm payrolls yet to show a sustained increase in labour market slack, we now see the rate hike cycle extending to 4.875% at March. However, by that time, a much weaker labour market and stalled economy will call for an end to hikes, with cuts to come in 2024.”

BofA

“We expect the Fed to raise its target range for the federal funds rate by 50 bps in December to 4.25-4.5%. We expect the median forecast for 2023 to move up by 50 bps to 5.125%, consistent with our terminal rate. We think the dot plot will then point to 100 bps of cuts each in 2024 and 2025. The macro projections in the SEP should be revised to show lower GDP growth and inflation than in September and higher unemployment. We expect Chair Powell to push back against easing in financial conditions and remind investors that a slower pace of hikes does not mean a lower terminal rate, and the Fed's job is far from done.”

Commerzbank

“The Fed will in all likelihood raise its key interest rates by 50 bps and thus not follow up the series of four jumbo steps of 75 bps each with a fifth. This was clearly communicated by the Fed in the run-up to the meeting. This would have put the Fed's key interest rates up by 425 bps in 2022, a very fast pace.”

Nordea

“We expect the Fed to hike the fed funds rate by 50 bps and to increase the rate path by 25 bps for 2023 and 50 bps for 2024. This will leave the dot plot far above the current market pricing for the next two years. We are, however, unsure as to how vocal chairman Powell will be in commenting on market pricing as he has gradually moderated his remarks since the previous FOMC meeting. The other members on the committee are also less in unison about how tough monetary policy should be going forward. We still expect that rates will need to be kept clearly in restrictive territory at around 5% for some time into 2024 in order to moderate economic activity and balance the labour market.”

TDS

“We expect the FOMC to deliver a 50 bps rate increase at its December meeting, lifting the target range for the Fed funds rate to 4.25%-4.50%. In doing so, the Committee would finally move the inflation-adjusted policy stance into restrictive territory. We also look for the FOMC to signal that they will have to move to a higher terminal rate than anticipated in September, and for Chair Powell to build on the message from his Brookings Institute speech in November.”

Swedbank

“We expect that the Fed will downshift from 75 bps to 50 bps in December because of lower inflation and the fact that the federal funds rate has quickly been raised to restrictive levels. The policy rate is getting close to Fed’s preferred measured of inflation (PCE core deflator was 5% YoY in October). And yet, we see a higher risk that the Fed will hike by 75 bps rather than only by 25 bps, given that the jobs report for November was such a strong reading, not least wage growth. We look for the median dot to be revised up by at least 25 bps for 2023, but we see a high possibility of it being by 50 bps. For 2024 and 2025 on the other hand, we expect that the dot plot will continue to indicate cuts, just like it did in September. Given that the dot plot is expected to show a higher federal funds rate, we expect some slight downward revisions to the GDP estimate and upward revisions to the unemployment and inflation estimates.”

Rabobank

“We expect a 50 bps rate hike at the December meeting of the FOMC and an upward revision to the rate projections of FOMC participants, with the terminal rate in 2023 in the neighborhood of 5.0%. We expect that Powell will continue to push back against rate cuts in 2023, repeating that restoring price stability will require holding policy at a restrictive level for some time and that history cautions strongly against prematurely loosening policy. Meanwhile, obscured by Powell’s hawkish consensus view, the dot plot is likely to show considerable disagreement about the terminal rate. This could become more prominent in 2023 when the subset of voters becomes more dovish.”

RBC Economics

“We expect the Fed to hike the fed funds target range by another 50 bps, a step down from 75 bps at each of the past four meetings. Still, some early signs of easing in price pressures could mean interest rates are nearing sufficient levels to bring inflation back towards the Fed’s 2% inflation objective. As focus shifts from the pace of rate hikes to a possible landing spot, updated economic projections from the Federal Open Market Committee will be closely watched for changes in the expected terminal level of the fed funds target. Overall, we still think the Fed will hike by another 50 bps in the first quarter of 2023 before pausing at the 4.75% to 5% range.”

NBF

“The Fed is set to increase its policy rate for the seventh consecutive meeting. FOMC participants have openly signaled that they’d like to slow the pace of rate hikes and as a result, a 50 bps increase is the clear-cut consensus expectation. With little uncertainty on the size of the hike, the focus will instead be on the forward guidance the Fed provides, with an update to their 'dot plot' set to be released. Previously, the median expectation was for a peak policy rate of just below 5% but Chair Powell, and some others, have made the case that a slightly higher peak rate may be needed.”

SocGen

“We look for a 50 bps hike but expect the Fed to emphasise ongoing hikes into 2023.” 

CIBC

“The Fed will press on with a highly-telegraphed 50 bps hike, countering the implicit dovishness inherent in moving to a smaller step up with a message that will emphasize that at least one more similar move lies ahead. We expect the Fed to take the ceiling on the funds rate to 5%, and see that as sufficient, along with supply-side progress, to quell inflation in the coming year. But we could see Powell’s press remarks emphasize that counter to what markets are pricing in, the central bankers will need to maintain that tighter stance through 2023 for the slowdown in growth to open up enough slack to keep inflation grounded in 2024.”

Citibank

“The Fed is poised to slow the pace of rate hikes to 50 bps this week to bring the Fed Funds rate to 4.25-50% but the 2023 median ‘dot’ that may rise to 5.00-5.25%, and Chair Powell may also reiterate his call to focus on the need to counter risks of persistent inflation with higher policy rates.”

Wells Fargo

“We expect to see the fed funds rate rise 50 bps to a range of 4.25%-4.50%. This represents a significant hike over the current range of 3.75%-4.00% but is still a downshift from the four consecutive 75 bps hikes at the prior four FOMC meetings. The FOMC's post-meeting statement and the Summary of Economic Projections (SEP) are likely to be positioned toward hawkishness even with the downshift in rate hikes. We look for the post-meeting statement to again note that ‘ongoing increases’ in the fed funds target will be ‘appropriate,’ and we look for the so-called ‘dot plot’ to shift higher. We now expect the end-of-2023 median fed funds rate estimate to reach 5.00%-5.25%, an increase of 50 bps since September, and where we expect the fed funds rate to be at the end of next year. We also expect that most FOMC members will continue to forecast a ‘soft landing’ with only modestly weaker GDP growth rather than outright recession.”

Swedbank

“We expect the Fed to raise interest rates by 50 bps to 4.25-4.50% in December, thereby slowing down the pace of tightening, as inflation has started to come down and since the federal funds rate has quickly been raised to restrictive levels. Thereafter, we expect another 25 bp in February 2023. We expect the December dot plot to show an upwardly revised median dot for next year since the Fed has clearly signalled that the federal funds rate might end up higher than what they expected previously. The balance sheet continues to decline by up to USD95 bn per month.”

UBS

“We still expect the Fed to moderate the pace of rate hikes to 50 bps but the new dot-plot, economic projections, and comments around the likely trajectory of rates next year, will be key drivers for markets and are likely to spark further volatility.”

OCBC

“We expect the Fed to pare back its pace of rate hike to 50 bps, following its previous four consecutive 75 bps rate hikes. This will bring the Fed funds rate to 4.25%-4.50%.”