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The Fed Will Hike Rates Even Higher After September Inflation Data

  • Barclays said Thursday it now expects “more aggressive, front-loaded hikes by the Fed” after September’s CPI.  
  • It projects the Fed to raise rates by 75 basis points in December and by 50 basis points in February 2023. 
  • It also sees the central bank starting to cut rates later next year. 

The Federal Reserve could push up its benchmark interest rate past 5% in 2023, Barclays said Thursday as September’s hotter-than-anticipated inflation report prompted it to change its projections for the central bank’s policy moves. 

“We now expect more aggressive, front-loaded hikes by the Fed in the next few meetings,” Jonathan Millar, senior economist at Barclays, said in a note.

Barclays now expects policy makers to raise the fed funds rate by 75 basis points in December, compared with its prior view of a hike of 50 basis points. 

For the first meeting of 2023, Barclays foresees a rate hike of 50 basis points, up from its past forecast of 25 basis points. It held to its view that in November the Federal Open Market Committee led by Jerome Powell will increase the rate by three-quarters of a percentage point. 

Put together, that would propel the fed funds rate to a range of 5% to 5.25% in February. Barclays had earlier forecast a range of 4.5% to 4.75%.

The Bureau of Labor Statistics on Thursday said the core Consumer Price Index — an inflation measure excluding volatile food and energy prices — rose 6.6% in the year through September, the fastest price growth since 1982. Expectations were 6.5% among economists polled by Bloomberg. 

The “surprises within core services were broad-based, reflecting firming prints for both the rent of shelter components … and ex-shelter services 0.9% month over month,” said Millar. He noted the gauges of Owners’ Equivalent Rent and rent of primary residence each  accelerated to 0.8% month over month. 

“Hence, the latest estimates show broad-based acceleration in the service category, which is clearly inconsistent with the FOMC’s resolve to continue with aggressive hikes until it sees ‘clear and convincing evidence’ of a sustained decline in inflationary pressures,” said Millar. 

After the September inflation report, investors believe the odds of a 75-basis-point rate hike at the December Fed meeting have doubled

“With the FOMC’s backward-looking reaction function intensifying overtightening risks, we now expect the FOMC to cut the funds rate by 75 bp in the final three meetings of 2023,” said Barclays. Such moves would bring the fed funds target range to 4.25% to 4.5% at end of next year, compared with the investment bank’s prior projection of 4%-4.25%. 

The Fed is expected on November 1-2 to deliver its fourth straight rate hike of 75 basis points and its sixth increase of 2022. The benchmark rate stood at 3%-3.25% after starting from zero this year.

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