Fed’s dovish pivot will have to wait – RBC Economics

A hawkish Federal Reserve and firm US inflation pushed Treasury yields to fresh highs. Economists at RBC Economics now see fed funds rising to 4.50-4.75% early next year.

Yield curve to flatten further in the coming months

“We continue to expect the US economy will slip into recession in the first half of next year with the jobless rate rising to 5% in the second half of 2023 (the Fed’s Q4/23 forecast is just 4.4%).”

“While we think the economy will ultimately fare worse than the Fed is projecting, we see little reason to push back against its near-term tightening plans. So the Fed’s dovish pivot will have to wait.” 

“Our forecast now assumes another 75 bps hike in November followed by a 50 bps increase in December and 25 bps in February.” 

“The yield curve is likely to flatten further in the coming months with longer-term yields expected to come down amid a softening economic backdrop and easing inflation, while a still-hawkish Fed will keep the front end sticky.”