We think the Fed is done with rate hikes

Comments by Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors.

• We do not expect a rate hike from the Fed at its 19-20 September meeting.
• The Fed has entered the most mature phase of its monetary tightening cycle.
• The markets’ attention will now be focused on the potential timing of a first rate cut in 2024.

We do not expect a rate hike at the Fed’s 19-20 September meeting. Markets are currently pricing in a 44% probability of one further 25bp hike between now and the end of 2023,¹ but we believe the Fed has completed its rate hike cycle.

Admittedly, investors continue to be surprised by the US economic data, which confirms the resilience of the US economy month after month. However, recent economic data point to continued disinflation, particularly in services, and to easing labour market tensions, which are a key indicator for the Fed.

The downward trend in inflation is also reflected in consumer sentiment. One-year consumer inflation expectations fell to 3.1% in August (the lowest since March 2021) versus 3.5% the previous month, while 5-10 year expectations fell to 2.7% from 3% the previous month.²

Although the FOMC meeting has no bearing on the possibility of a rate hike, the markets will be paying particular attention to Fed Chairman Jerome Powell’s speech on the timetable for monetary policy changes. After the sharp correction in the short end of the US yield curve over the summer, the theme of “higher for longer” has taken hold. A first rate cut has been pushed back and is now expected by the markets in July 2024. Any upward revision in Fed members’ “dot plot” guidance for future rates will therefore be closely watched.

Against this backdrop, after the pressure on US yields seen in recent weeks, we believe it is time to consider regaining duration on the US curve, particularly in the belly of the curve.

^{1 Bloomberg, 18 September 2023}

^{2 University of Michigan, 15 September 2023}