Fed Preview: Forecasts from 16 major banks, dialing down rate hike to 25 bps

The US Federal Reserve will announce its monetary policy decision on Wednesday, February 1 at 19:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 16 major banks. 

The Fed is set to raise rates by 25 basis points (bps) – that is fully priced in – despite some signs of economic weakness. 

ANZ

“We expect that the FOMC will raise the fed funds target by 25 bps and guide that further rate rises will be appropriate amid cautious optimism that inflation will subside sustainably. We also expect it will guard against relaxing the fight against inflation too early. Risk management of the cost-of-living crisis skews policy towards over, rather than under tightening. We are increasingly confident that inflation will subside. However, we think that CPI inflation may overstate price weakness this year and, with the labour market still very tight, rates will remain at peak levels in 2023.”

Danske Bank

“The Fed looks keen on raising Fed funds rate to 5%. We expect a 25 bps rate hike followed by another 25 bps hike in March and May, respectively. A turn in the business cycle and drop in short-term inflation expectations pave the way for rate cuts next year, but the neutral rate is higher than before the crisis. We think the trajectory for Fed funds discounted by markets looks broadly fair, but we see slight upside to the front end of the curve and in particular 6M-2Y.”

Westpac

“Coming into the Jan/Feb meeting, the market believes US inflation is well on its way back to the FOMC’s target, leaving the Committee with little more to do. indeed, it could be argued that, were the FOMC not as resolute in their determination to remove all inflation risks, the market could have seen this meeting as the last move – so confident participants have become in the US inflation outlook. Since the CPI peaked in June 2022, we have anticipated a rapid easing in pressures and risks. But, we also recognise it will likely take until March for the FOMC to feel confident to stop. Hence we expect this cycle to end with 25 bps hikes in Feb and Mar.” 

Commerzbank 

“The Federal Reserve is likely to raise the target range for federal funds by just 25 bps, having already shortened the rate hike to 50 bps at its last meeting. The economy is cooling down as desired, and inflationary pressure seems to be easing noticeably. The rate peak is therefore no longer too far away.”

Nordea

“The Fed will likely slow down its rate hikes again, and deliver a 25 bps rate hike. A key part of the statement says the Committee anticipates that ongoing increases in the target range will be appropriate. If that part is maintained, this would suggest that the Fed still expects to raise rates more than once after this week, which would be more than the market is currently pricing in. We think that part will be included, which could be perceived slightly hawkishly at least as a first response, given that the market is not pricing in much more than a 25 bps rate hike this week. Such a hawkish move could easily be reversed after Powell’s comments, which are likely to illustrate that the peak in rates is approaching.”

Rabobank

“The recent decline in inflation has increased the probability of a further reduction in the size of the Fed’s rate hikes to 25 bps in February, from 50 bps in December. We continue to think that based on the fading momentum of inflation, the FOMC is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year. Meanwhile, we still see upside risks to inflation and the federal funds rate during the course of the year if new negative supply shocks take place and/or the wage-price spiral gets out of hand.”

SocGen

“We expect a 25 bps rate hike and steady increases until the fed funds rate reaches the 5.0-5.25% target range.”

CIBC

“A quarter-point hike is well-telegraphed from the Fed, and we still see one more such move ahead, in part as a necessary counterweight to the easing in monetary conditions that financial markets have generated in pushing term yields lower. To combat that trend, look for the Fed’s messaging to lean strongly away from the notion that it will have room to cut rates in the back half of this year.”

Wells Fargo

“We expect the FOMC will raise the fed funds target range by 25 bps. This would be the smallest increase since the very first hike of the tightening cycle in March 2022. Ultimately, this meeting should signal that the Fed's work on this hiking cycle is nearer completion but not yet done. Our current expectations are for 75 bps more cumulative tightening, bringing the target range for the fed funds rate to 5.00%-5.25%. If our forecast is correct, then we would still have two more 25 bps rate hikes at the March and May FOMC meetings.”

Barclays

“We expect the FOMC to again slow the pace of hikes, raising the target range by 25 bps to 4.5-4.75%. Such a move would be in line with pre-blackout FOMC communications and supported by accumulating evidence that inflation and wage growth are decelerating, and signs of a slowing economy. A key challenge for the FOMC will be to execute its transition to smaller rate hikes without furthering expectations that an end to its hiking cycle is imminent. The post-meeting press conference should be particularly interesting in that respect. We expect Powell to signal a peak rate of 5.1% in 2023, possibly by mentioning that last December’s dot plot by the FOMC remains appropriate.”

BofA

“We look for the Fed to raise the target range for the federal funds rate by 25 bps to 4.50-4.75%. The message: Still cautious about inflation. While the Fed appears to favor another downshift in the pace of rate hikes, communication during the intermeeting period suggests policymakers have not changed their view on where the terminal funds rate is likely to end up or the view that inflation pressures will subside slowly. In other words, passing peak inflation is welcome and policymakers appear to have increased confidence that inflation is on a path lower, but the Fed is not yet convinced that inflationary pressures will dissipate quickly.” 

RBC Economics

“We do expect the size of its rate increase to mirror the BoC’s at 25 bps. That’s half the size of its December hike and would take the fed funds target range to 4.5% to 4.75%. In December, most Federal Open Market Committee participants expected that the fed funds target range would need to be lifted above 5% this year. But we expect a pause in the slightly lower range of 4.75% to 5% – provided ongoing softening in US inflation and growth trends persists.”

NBF

“The Fed is all but assured to deliver a 25 bps increase, which would bring the upper bound of its target range to 4.75%. We’ll be closely watching the guidance provided by the FOMC, both in the statement and in Chair Powell’s post-meeting press conference, to see if this has materially impacted their expected rate trajectory. It’s expected that the Fed will continue to guide markets towards a 25 bps hike in March but continued softness could change that before the following meeting.”

ING

“We expect the Fed to raise the policy rate by 25 bps. This marks a clear slowdown in the pace of tightening and appears justified given inflation is moving in the right direction and activity is slowing. However, the Fed remains wary and will again suggest that this is not the end for interest rate increases. The central bank will also be keen to dismiss the notion that it is preparing for potential rate cuts later this year. Financial conditions have loosened given movements in the Dollar, Treasury yields and credit spreads and it may feel that any further loosening, fuelled by talk of potential policy easing in the second half of the year, could undermine its current actions in fighting inflation.”

Citibank

“We expect the Fed to raise rates by 25 bps with modest hawkish risks. The statement will likely continue to reflect that ‘ongoing increases’ or perhaps ‘further increase’ will be appropriate. A dovish surprise would be language change to ‘some further increases’ or dropping the forward guidance altogether. Powell will likely take the opportunity to reassert that policy rates will likely rise to above 5% and stay there, but he may be happy to give relatively little push-back to current market pricing and await further data to more clearly indicate the appropriate trajectory for policy rates.”

Erste Bank

“A rate hike of 25 bps is emerging quite clearly for us. The outlook that the FOMC and Fed Chairman Powell will give the markets should not change much. Further interest rate hikes are likely to be in the cards, precisely because the data is not yet sufficient to confirm a sustained downturn in inflation. We expect another rate hike of 25 bps in March, which should be the end of the rate hikes.”