After Fed's stiff hike, here's how Citi and Stan Chart see things playing out

The Federal Reserve has raised rates, as expected, but its statement and Jerome Powell’s press conference indicated that the terminal rate would be more than what the Fed initially thought – that seems to be the statement that spooked the market. The dovish part of the statement was that it indicated the Fed would take note of the impacts of the hikes taken so far and the fact that they take time to impact the market. The statement, however, added that slowing the pace may be discussed next meeting or in the one after. Risk assets have since fallen very sharply.

In an interview with CNBC-TV18, Steve Englander, Global Head-G10 FX Research and North America-Macro Strategy at Standard Chartered, and Robert Sockin, Global Economist at Citi discussed at length the impact of the Fed hiking cycle and the statement.

On November 2, raised its key short-term rate to a range of 3.75 percent to 4 percent, its highest level in 15 years. It was the central bank’s sixth rate hike this year — a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.

First up, Englander said that the Fed will back off if the economy is weaker than expected. “I am not as convinced by the jobs data; they look very anomalous compared to real wages that are still falling, some of the other indications we are getting from the economy. I think that the Fed will back off if it turns out that the economy is weaker than he thinks.”

According to him, it is hard to see what has worsened that resulted in such a hawkish tone. “I was a bit surprised. There has only been one CPI and one payroll report since the September FOMC, where they put the 4.6-5 forecasts down. So, it is hard to see what deteriorated so much that Powell had to take such a hawkish tone with respect to how far rates might go.”

Meanwhile, Sockin said that Citi predicts a mild recession in the second half of 2023 and a strong growth bounce back after that but there is still a risk that Fed could raise hikes by 75 bps in December.

“You could get a little more upside there (10-year US Treasury) in the near term, but longer term it will depend on the extent of the US slowdown. So right now we are forecasting a pretty mild recession in the second half of 2023 and you can get a strong growth bounce back after that,” he said

“It is going to depend crucially on how the expectations evolve for the upcoming recession next year in our view and how long that lasts,” Sockin added.

While talking about the statement, he said that the tone around Jerome Powell's press conference took one by surprise. Powell showed a preference for over-tightening versus under-tightening.

“He (Chair Powell) said if the Fed were to over-tighten, they could use tools to support growth in that scenario, and at least inflation would be coming more towards the target in that scenario. However, if they were to under-tighten, then inflation could become even more of a problem and that could lead to even more employment costs down the road.”

However, Standard Chartered expects a 50 bps and a 25 bps Fed rate hike in the next 2 meets and Citi is looking at a 50 bps rate hike in December and February each, followed by two 25 bps hikes.