PIMCO: Fed Preview

By Tiffany Wilding, PIMCO North American Economist

• At a minimum, we expect the Fed to announce another 75 basis point rate hike this week, and hint that a third 75bp hike may be necessary in September.
• Although Fed Governor Waller downplayed the likelihood of a 100bp hike in recent comments, we think the chances are closer to 50/50.

While there is good deal of uncertainty around the exact level of the Fed Funds rate that is consistent with neutral policy (i.e. policy is neither restrictive or accommodative), what is clear is the current level is still accommodative, and that is increasingly out of sync with economic fundamentals, including the elevated level of inflation.

As a result, we think the Fed will ultimately want to realign policy as quickly as possible, which argues for a 100bp hike to bring the policy rate to just above 2.5% (the Fed’s estimates of the long-run neutral rate).

Still, regardless of what they ultimately decide this week, we expect the Fed will revise up their Fed Funds rate projections for the end of 2022 when the new Summary of Economic Projections (SEP) is released in September, by pulling forward the two hikes that were previously forecasted for 2023 into 2022.