ABU DHABI, 20th September, 2022 (WAM) — Economic circles and financial markets around the world are awaiting the decisions of the US Federal Reserve Board at its meeting, to be held tomorrow, Wednesday, with expectations that the Federal Reserve will raise interest rates by about 75 basis points (bps). The Federal Reserve had already raised interest rates 4 times in 2022, in a move aimed at limiting the fallout of inflation, which reached unprecedented levels.

The Federal Reserve is expected to increase the interest rate several times over the remainder of the year until it reaches 3.75-4.00 percent, with projections for it to reach 4.25-4.50 percent in 2023, economic experts and analysts told the Emirates News Agency (WAM).

Stefan Gerlach, Chief Economist at EFG Bank in Zurich, told WAM that he expects the Federal Reserve to push up interest above 4 percent at its meeting on 13th-14th December.

“The very strong Consumer Price Index (CPI) data for August was clearly unsettling both for market commentators and the Fed. With annual headline CPI inflation in August falling by much less than expected, despite the collapse of gasoline prices, and with annual core inflation unexpectedly increasing, it appears clear that inflation pressures are substantially stronger than most commentators anticipated. This means that the Fed will need to set higher interest rates, and keep at that elevated level for longer, than was expected even a few weeks ago,” he explained.

Gerlach added, “The Fed sets a target range for the federal funds rate. Currently, that target is 2.25-2.50 percent. Market participants expect that the bank will raise that range by 0.75 percent at its meeting on 21st September, by another 0.75 percent on 2nd November, and another 0.50 percent on 14th December to 4.25-4.50 percent. That seems plausible. However, the Fed is data dependent, and if incoming data on inflation or the labour market are stronger or weaker than expected, the Fed and market commentators will change their outlook for interest rates.”

“It is very difficult to guess at what level interest rates will end in 2023. It seems plausible that after having kept rates about 4 percent for 3-4 quarters, the Fed might feel it is time to start to lower interest rates. So I expect that interest rates may end 2023 just below 4 percent, but that is a pure guess and depends on how the economic conditions will evolve.”

For his part, Gero Jung, Chief Economist at Mirabaud commented, “We expect interest rates to go up further, including in the US – where high inflation is very much a demand side problem, given the strong stimulus that was injected into the economy during the health crisis.

“At the upcoming 21st September, we expect the Federal Reserve to hike its interest rates by 75bp. This comes notably after the very strong CPI inflation data for the month of August, which showed broad-based strength across many major categories. It implies that central bank interest rates will be higher for longer, and also signals a higher terminal rate. We also anticipate an updated Fed ‘dot plot’ that is likely to include ‘dots’ that include a Fed funds rate above 4 percent next year.”

Asked about the expected interest rate hikes in 2022 and 2023, Jung said, “After the 21st September move of 75bp to a Fed funds rate range of 3-3.25 percent, we expect a 50bp rate hike in November and a 25bp move in December. This would leave the Fed funds rate between 3.75-4.00 percent by the end of this year. We then expect a 25bp move in February, followed by another 25bp move in March, and then pause. This would leave the Fed Funds rate between 4.25-4.50 percent over the remainder of the year. The risks, however, are that the Fed will do more, and not less!”