Fed: rates peak at 5,50% and fall in 2024 with oil at $100 a barrel?

The Federal Reserve will publish a statement Federal Open Market Committee (FOMC) on Wednesday at 20:00. The Fed Funds futures market is discounting a very high probability, 99%, that the Fed will leave interest rates unchanged at 5,50%.

This meeting will be followed by two more meetings before the end of the year. At the meeting on November 1, the probability that interest rates will remain unchanged 5,50% is 69%. At the 13/23/5,50 meeting, the probability of keeping interest rates unchanged at 58,1% is XNUMX%.

The probability of keeping interest rates at 5,50% is highest until the meeting on June 24, when the market will start discounting the first cut. If the path is maintained, it can be said that the cycle of interest rate increases is over

Prospects for further action may be visible in projections

In terms of the path of possible interest rate movements, it is worth noting that the Fed will update its economic projections. Previous forecasts released in June (Central Band) are as follows:

• Interest rates:  2023 (+5,5%), 2024 (+4,75%), 2025 (+3,5%) and long-term (+2,65%)
• GDP (real):  2023 (+0,95%), 2024 (+1,2%), 2025 (+1,8%) and long-term (+1,85%)
• Unemployment rate:  2023 (+4,15%), 2024 (+4,45%), 2025 (+4,45%) and long-term (+4,05%)
• Headline inflation (PCE):  2023 (+3,25%), 2024 (+2,55%), 2025 (+2,2%) and long-term (+2,0%)

Rising energy prices may create uncertainty in the short and medium term

The recent sharp increase in energy prices is the element that may generate the greatest uncertainty. On the one hand, it may slow down the rate of decline in headline inflation in the medium term, and on the other hand, it may negatively impact economic growth. Headline inflation in August rose from +3,2% to +3,7% y/y, rising for two consecutive months and coinciding with a decline in University of Michigan consumer confidence that is far from yearly highs.

Additionally, the US dollar has been rising continuously for 9 weeks, which may also be important for the American economy, where a continuation of such increases could affect the condition of exporters. In turn, the situation on the labor market is not the worst, but it is worth remembering that from the beginning of the year everyone NFP report is revised downwards and the average for the creation of new jobs is systematically decreasing. Additionally, the impact of rate increases on the labor market is not yet as visible as their impact, for example on the real estate market. Here the impact time is much longer.

Taking all this into account, you might get the impression that Fed is not so much close to a pause, but to the end of the cycle, because we also observe an increase in bond yields, which helps in monetary tightening. What the Fed could do is be more forceful in its message, and it could also raise estimates in its macroeconomic projections.