The Zhitong Finance App learned that the Federal Reserve will announce the October interest rate decision on Wednesday (2 a.m. Beijing time on Thursday) local time. The market generally expects the Fed to keep interest rates unchanged. The previous meeting had already raised interest rates by 25 basis points. Michael Gapon, the chief US economist at Morgan Stanley, agreed with the market judgment. He said that the Federal Reserve will stay on hold in October, but the market should still expect policy interest rates to rise in the future.
Gabon said that even if the Federal Reserve keeps interest rates unchanged this month, “the Federal Reserve is far from out of trouble.”
How does the Federal Reserve justify keeping interest rates unchanged?
Gabon believes that the Federal Reserve will adopt a wait-and-see attitude, saying it will observe potential trends to evaluate the final direction of the policy. “So I think the current balance is that they keep interest rates unchanged,” but they expect policy interest rates to rise in the future.
According to data from the CME FedWatch tool, the market believes that the probability that the Fed will keep interest rates unchanged this week is 88.9%, a sharp increase from 35.8% a month ago; at the same time, the data shows that the probability of raising interest rates by up to 50 basis points is 81.6%.
Gabon believes that the Federal Reserve may argue that it will judge for itself whether the tightening of the financial environment is sufficient, and then decide the policy path based on this. He said, “One reason against raising interest rates at every consecutive meeting is that it may cause excessive tightening of the financial environment.”
However, he added that whichever path the Fed takes, there are risks, but it is more likely to take “more gradual steps.”
The market can withstand interest rate hikes of up to 100 basis points
The economist also believes that the Middle East war and rising oil prices will pose risks to inflation, adding that Morgan Stanley is “incorporating some of the effects into next year's inflation forecast,” and the Federal Open Market Committee (FOMC) may also consider this.
The bigger question is whether the Federal Reserve is willing to raise interest rates every other meeting and evaluate it based on the latest data. Gabon added that the energy market may determine the direction of policy.
“I think the economy can withstand a total of 75 to 100 basis points of interest rate hikes without causing huge concerns about yield,” Gapon said. But he warned that if the Federal Reserve needs to raise interest rates six to seven times in total to return to 2023 levels, it may raise some concerns.
As of press release, NASDAQ futures and S&P 500 futures declined slightly, while Dow futures rose 0.16%.