Banks Brace for December Rate Hikes: Experts Predict No Reprieve for Investors

Banks remind everyone that just because rates went up more slowly in December doesn’t mean it’s lower.

Risk assets, like cryptocurrencies, have recently found a footing on hopes that the Federal Reserve (Fed) will stop big interest rate hikes starting in December to end so-called “liquidity tightening” sooner than expected and signal this at its meeting on November 2. However, big investment banks think that the Fed could keep the door open for more big rate hikes, and a switch to smaller rate hikes wouldn’t necessarily mean that liquidity tightening would stop sooner.

This year, the Fed raised the cost of borrowing by 300 basis points (bps), which shook risk assets. The central bank is likely to raise interest rates by 75 basis points on Wednesday, which would be the fourth time they have gone up. This would bring the cost of borrowing money to a range of 3.75–4%. It could mean that rates will fall by 50 bps in December.

When they priced in a slowdown in the number and size of rate hikes starting in December, the markets seem to have been too optimistic. Based on the Fed funds rate futures, traders think that the rate hike cycle will peak at around 4.8%. This is less than what the peak rate was two weeks ago when it was 5%. In two weeks, Bitcoin has gone up by 10%, while the dollar index has gone down by more than 2%. However, inflation is still high, which suggests that the Fed doesn’t have much room to become more dovish and stop raising rates any time soon. This is bad news for assets with high risk.

The core PCE, which is the Fed’s preferred measure of inflation, went up 0.5% from August to September, the same as in August. The rise from one year to the next was 5.1%. That is a lot more than the annual goal of 2% inflation. Also, the cost of working keeps going up at a rate that is twice as fast as it has been in the last 15 years. The Fed could keep raising interest rates more slowly for a longer time. This could make it more expensive to borrow money than the market rate of 4.8%.

“The Fed will stress the importance of data next week. They will get two more NFP and CPI prints before the December meeting. If they stay hot, another 75 bps is likely, but if they cool off, a 50-bps slowdown is possible,” Bank of America strategists wrote in a weekly note sent to clients on Friday. The market wants a change, but slower doesn’t always mean lower.

“The Fed won’t stop raising interest rates until the data say so. Core CPI is at a cycle high, but U3 unemployment is at a cycle low. Companies tell us that hiring people is their biggest problem. China and the US are growing apart. Capex is going up. Food and energy are getting harder to find. Inflationary pressures seem to be widespread and getting stronger. Short-term surveys show that inflation expectations have risen. The Fed still has work to do,” strategists said.

In the weekly note, Barclay’s credit research team said something similar, saying that a possible bias toward smaller rate hikes wouldn’t be a real “dovish pivot.”

“Before the Fed becomes more dovish, inflation needs to start going down and the job market needs to get worse. As a result, Barclays’ credit research team thinks it is likely to keep its flexibility in December. As a result, we don’t see much more downside for the USD, and the broad dollar could bounce back this week,” they said.

Most likely, a stronger dollar will hurt risky assets like cryptocurrencies. Most of the time, Bitcoin goes in the opposite direction of the dollar.

Lee Hardman, a currency analyst at MUFG Bank, told a client on Tuesday, “If the Fed does slow the pace of hikes in December, it does not mean that the total amount of tightening delivered in the current tightening cycle will be less, though that will be the initial assumption.”

Hardman said, “It’s possible that the Fed will slow the rate of rate increases but keep raising rates for a longer time.”

Here is what the other banks want:

The Danske Bank

“It’s too early for the Fed to go soft, so we expect a 75bp hike and hawkish talk.” “The Fed will raise interest rates by another 150 basis points this year and then stop.”

The ING Group

“It’s possible that the rate of tightening will slow down after December, but inflation isn’t under control, and there’s a chance that rate hikes could last longer.”

The Groupe SEB

“We expect Fed Chair Powell to say again that policy is based on data and will be decided at each meeting. He may also say that it may be time to slow the pace of rate hikes, leaving all options open for December, when the FOMC will release new economic and rate forecasts.”

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