Terminal Rate Set To Be Raised 25-50bp In Next Dot Plot

What is that “sufficiently restrictive” level mentioned in November's FOMC statement? Chair Powell said that “we don't really know exactly where that is”. Data since the September FOMC meant the “ultimate level of interest rates will be higher than previously expected”, Powell said.

• Unsurprisingly, he noted continued strong jobs data and sounded almost despairing about the September CPI numbers which showed no (let alone clear and compelling) evidence that inflation is moderating.
• The last Dot Plot median saw rates reaching 4.5-4.75%, with PCE inflation at 2.8% in 2023. With inflation forecasts likely revised up on the basis of incoming data, and potentially a higher real rate seen required to tame inflation, the terminal rate median looks likely to be raised in December by at least 25bp and probably 50bp to 5.00-5.25%, or 100-125bp from the current funds range.
• With Powell saying it is “very premature” to think about pausing, another 100bp of further hikes looks the absolute minimum. MNI’s operating assumption since the September CPI reading was that we’d get another 75bp in December, with a downshift to 50bp in February, potentially bringing the cycle to an end after another 125bp of hikes.
• That’s still very much on the table if the October and November CPI readings do not moderate (we get both readings prior to the December decision). However the risks of a 50bp / 50bp / 25bp (March) hike sequence are now more elevated.
• More on all of this in our November Fed Review.