How will US Fed decide?

Next week, the US Fed will set the next interest rate step and increase the range for the key interest rate by 50 basis points (bp) to 1.25-1.5%. The guidance for the markets should not bring anything new. The FOMC, the body that decides on monetary policy, should continue to assume a series of rate hikes and Fed Chairman Powell will confirm that 50bp rate hikes are on the table at the upcoming meetings. This continues the course of the last meeting in May, as the economic data has not brought any serious changes since then. The labor market has been essentially consistently strong and inflation has remained high.

There will also be new estimates from meeting participants on the development of the main macro variables, including the key interest rate. Compared with the last forecasts in March, expectations for the federal funds rate should be raised. At that time, the median estimate was 1.9% at year-end 2022, which would imply rate hikes of 100 bp, including next week's rate hike. By comparison, the market is currently pricing in double that. FOMC members will likely revise their expectations upward; the question will be whether to the same extent as market expectations. Since there will be only four meetings after next week's meeting, the assessments should carry some weight. At the same time, however, it is unlikely that FOMC members' estimates will differ significantly from market opinion. Estimates for year-end inflation could be raised somewhat. Growth for 2022, on the other hand, should be revised noticeably, as the last forecasts were issued before the release of the surprisingly weak 1Q data. Overall, the inflation and growth forecasts should not have a significant impact on the markets.

So, in sum, next week's FOMC meeting should have little impact on the markets but should confirm the path and set the next step. For the rest of the year, including next week's rate step, we expect rate hikes of 150 bp. June should be followed by a 50 bp rate hike in July as well. Due to a slowdown in the US economy and falling inflation rates, we expect interest rate hikes of 25 bp in September and November before the Fed decides to at least pause its rate hikes in December.

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