The Fed raised its policy rate target range by 75 BPS to 3.75-4.00%. We believe it is likely that the Fed will raise its policy rate by another 50 BPS in December and another 50 BPS or so during Q1 2023.
Where we differ with the street is that we believe that the Fed will hold its policy rate at an elevated level through all of 2023.
- We believe that the Fed would change its stance if the credit markets froze, or if investors weren’t able to redeem holdings in a distressed debt fund – that type of Financial risk.
- If a small or mid-sized bank blows up because it was over-exposed to the CRE Office sector as an example, we do not believe the Fed would alter its course.
- If Italy was to have issues as the U.K. has had with the Dollar, we do not believe the Fed would step in.
- If the number of bankruptcies increases significantly, we do not believe the Fed would step in.
- If unemployment broaches 5-6%, the Fed would likely alter its course.
It is important to note that the Fed continues to reduce its Treasury and Agency security holdings. In doing so, the Fed reduces the monetary base/money supply and this has a tightening effect at least as great as adjusting the policy rate upward.
The Fed’s next balance sheet update will be after the close on Thursday. Here is our most recent update: Click HERE.