Comments by Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors, ahead of the Fed meeting on 31 October and 1 November.

We expect the US Federal Reserve to leave rates on hold at the next meeting of its Federal Open Market Committee. Recent macroeconomic data supports maintaining the status quo.

Admittedly, growth in gross domestic product accelerated in the third quarter, to +4.9%1 year-on-year, compared with +4.5% expected and +2.1% in the second quarter. However, this growth was essentially driven by consumer spending (+4% compared with +0.8% in the 2nd quarter), as households drew on their savings. We believe that the recent growth in consumer spending has probably peaked after the strong support given to consumers during the Covid-19 pandemic. After a drastic tightening of monetary conditions, we forecast the US economy to enter recession in 2024. A slowdown in core inflation, the Federal Reserve's preferred measure of inflation, at 3.7%2 year-on-year in September, confirms the trend towards disinflation.

We believe that the Fed has completed its rate hike cycle. Of course, we cannot rule out the possibility of a final hike at the end of the year, which the markets are anticipating with a low probability (30%). But we believe that this would have only a limited impact on the markets. Investors are looking further ahead, preparing for a long period of plateauing interest rates, with the first cut anticipated in mid-2024.

The backdrop is favourable for US Treasuries. But short-term volatility cannot be ruled out, particularly in the event of a shock to energy prices.