He noted that the US Fed has rate of interest decisions scheduled for February 1, March 22 and May 3, with expectations that further hikes are slowly coming to an end based on inflation reports showing signs of easing. Despite the Fed announcing in December that it might raise rates of interest to five% in 2023, a 0.25 percentage point hike is projected for February 1 and March 22 – with hikes ending by the May meeting. This comes after a roller coaster ride involving seven rate of interest hikes last 12 months.
Forecast quarterly increases within the short term
McKnight explained why he believes the Fed will raise rates of interest by 1 / 4 of a percent in February and March. “Late – and I say late, speaking of the previous couple of weeks and months, as we have wrapped up 22 and entered 23, we’re beginning to see evidence of a broader economic downturn that was the goal of raising rates of interest – to slow that engine down a bit and take a look at to get the speed down without off the tracks. That is at all times the goal of the Fed. They often break down attempting to do that. Nevertheless, we see signs of an economic slowdown. We have a market consensus for less than 25 basis points hike next week.”
He predicted a pause in rate of interest hikes after reaching 5% or barely above: “Well, Fed funds are 4.5% today. Twenty-five (25) basis points gives us 4.75%. So when you extrapolate that, you are potentially perhaps two, perhaps three additional 25bps hikes.
The markets will like this move
McKnight said this scenario will resonate with Wall Street: “I think the market will interpret this in a really favorable light. The market will probably interpret this because the Fed being attentive and feeling the heart beat of the economy – versus further tightening rates of interest without seeing what the following effects are. I’m encouraged by that.”
Predicting the long run of rate of interest hikes will not be easy
Predicting is harder given the various barometers, he suggested: “Besides, when you take a look at the Fed Fund futures showing what the market is predicting versus what the Fed suggests their targets are, there may be a little bit of a discrepancy. The market is expecting smaller and lower rate hikes, and the stock markets and Treasury curve really reflect this sentiment. Unless we get a continuous strengthening of the labor market and a reversal of a number of the downturns and economic data which are emerging, it’s more likely to be.”