Odds of Fed achieving a soft landing don’t look good

AT THE end of trading on Tuesday (Nov 1), the federal funds futures market was pricing in an 83.5 per cent chance that the Federal Reserve would raise rates by 75 basis points to a target range of 3.75-4 per cent at its Wednesday (Nov 2) meeting.

What wasn’t – and still isn’t – known is what impact higher rates this year will have on the US economy and the rest of the world. As far as markets are concerned, the key questions are: when will the Fed taper the pace of its rate rises, and will there be a soft landing for the US economy?

So far, no one knows when tapering might commence and it’s unlikely that the Fed itself has any firm idea, since much would depend on incoming economic data. As far as the futures market is concerned, it expects rates to peak at around 5 per cent early next year and hopes that the Fed will start lowering rates by the end of the first quarter of 2023. Observers, however, have pointed out that with inflation running at a 40-year high of around 8 per cent, it may be necessary for rates to rise to at least that level, and that 5 per cent would be ineffective.