The Fed Has No Choice, 75 basis Points Is The Least It Can Make From

© Reuters – More and more insiders are expecting a benchmark rate hike of 75 basis points at the Fed meeting ending September 21 at the end of the day in Europe, although an even more substantial increase of 100 basis points does not is to be excluded.

According to Franck Dixmier, Global CIO Fixed Income at Allianz (ETR 🙂 Global Investors, in the face of an increasingly widespread economy, the Fed has no choice but to go beyond the simple normalization of monetary and neutral rate policies, to adopt even more restrictive measures.

Given the recent upward correction in bond yields and market expectations, AllianzGI does not however expect the FOMC meeting to produce any particular surprise reactions from the markets.

Determined against inflation

Dixmier recalls that at the symposium in August, Fed chairman Jerome Powell delivered a very firm message about the central bank’s absolute determination to tackle inflation. Since then, the inflation rush has surprised again on the upside and beyond expectations with the August figure at + 8.3% and the core figure at + 6.3%. With these numbers, Dixmier points out, the Fed has solid arguments for pursuing a strategy of rapid and significant rate adjustments.

For this, points out the AllianzGI expert, the Fed is increasingly forced to go beyond simple monetary normalization, which would imply bringing rates to a neutral level and merely considering a more restrictive policy. By acting forcefully and swiftly, the Fed has a clear objective: to impact demand and employment to break the price-wage spiral and put inflation back on a path compatible with the 2% price stability target.

Until it is convinced that the target is met, the Fed will keep rates high, even if it means then having to adjust downwards if the economic trend deteriorates significantly. For now, the US economy is resilient, despite advanced signs of a slowdown and correction in the housing market. The manufacturing activity index is still trading at 52.8 in August and growth in the services sector accelerated to 56.9 with households drawing on savings to support consumption levels.

Few surprises on the markets

Hence the expectations of an increase of 75 basis points by the FOMC, which could even reach 100 points, given that a new meeting is not expected in October. The
‘dot plot’ of FOMC members points to a Fed Funds level above 4% by the end of 2023, but following the recent upward correction in bond yields now the target could point to a peak between 4, 25 and 4.50% in the second quarter of 2023.

In any case, according to the AllianzGI expert, this FOMC should not cause big surprises on the markets.

This article was written exclusively by for Every week, “Market View” offers original interviews with investment houses on central market themes that will be reported exclusively on our website. It does not constitute an investment solicitation, offer, advice or recommendation

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About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

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