Fed to hike by 50 bps next week, terminal rate expected at 5.00-5.25% – Danske Bank

Next week, the FOMC will have its two-day meeting. Market participants expect a 50 basis points rate hike. Analysts at Danske Bank continue to expect a hawkish message regarding the policy stance in 2023. They think the recent easing in financial conditions is premature, and further hikes will be needed. 

Key Quotes: 

“US economy remains on a path of modest growth in Q4, and Fed needs to force a moderate recession next year to avoid prolonging inflation from here. Getting demand lower requires broad financial conditions to retighten again, which likely includes a combination of more rate hikes in Q1, still elevated longer real yields and stronger USD.”

“We acknowledge that our earlier call of a 75bp hike next week appears unlikely, but do not think the need to tighten monetary policy further has disappeared. We adjust our Fed call, and now expect 50bp hike next week, followed by 50bp in February and 25bp in March. Thus, we maintain our call for a terminal rate of 5.00-5.25% unchanged.”