The markets expect the U.S. Federal Reserve (Fed) to raise rates 0.5 percentage points at their next meeting on Wednesday December 14 at 2pm Eastern Time. That would a step down from the large 0.75 percentage point increases at recent meetings. The Fed stress their commitment to fighting inflation, but now rates are edging closer to where they want them.
Rate Hikes
A 0.5 percentage point hike would be consistent with recent speeches from Fed officials, including Jerome Powell’s recent appearance at the Brookings Institution. The markets see a slim chance that the Fed decides to make a 0.75 percentage point move. That would be a surprise, given the Fed has suggested it will make smaller moves as peak rates approach, in part as a way to manage risk of a policy error.
February Decision
The real question for markets is what the Fed does at its next decision in February 2023. Here the market seems a roughly equal chance of 0.5 percentage points and 0.25 percentage point hikes. Details from the December announcement may help inform that.
Will Rates Exceed 5% in 2023?
The rate decision and the accompanying announcement may not contain big surprises, but economic projections will be released too. Here Fed policy makers detail their assumptions for interest rates, unemployment, inflation and economic growth.
These were last released in September and in 2023 interest rates were expected to remain under 5%. It will be interesting to see if that still holds, or if officials see rates moving a little higher. Some policy-makers also implied a 2023 recession in their forecasts, and we’ll see updates there. Jerome Powell may also talk to this at the press conference after the rate announcement.
Incoming Inflation Data
The December Consumer Price Index (CPI) inflation report will come the day before the Fed announces rates. That report will weigh on the Fed’s decision.
Currently the Fed has suggested that the encouraging inflation numbers as reported in November could have been a one-off, and there’s potentially a lot more work to do before inflation returns to the Fed’s 2% goal.
December’s figures will help inform the trend of U.S. inflation. If there’s another encouraging inflation report, then the Fed may not move rates as high as 5% in 2023, but if November’s numbers for the October rate of inflation were a temporary reduction, then the Fed may move more aggressively in early 2023.
How High For How Long?
The Fed has also signaled that once interest rates reach their target level, they will hold them there for some time. As we approach 2023, the market will look for some clues as to how the Fed is thinking the duration of peak interest rates. Markets currently expect the Fed Funds rate to hold at around 5% for much of 2023.
In part the Fed has been able to raise rates aggressively because the U.S. job market remains strong. It remains to be seen if the prospect of a U.S. recession in 2023, encourages the Fed to soften its approach on interest rates. For now, that’s an academic discussion, as recent economic data has suggested a recession isn’t imminent.
The Fed has made its near-term position reasonably clear and December’s rate decision should not be a surprise. Upcoming data on unemployment and inflation will likely be just as informative in determining the path for interest rates in 2023 as the Fed’s statements. Hot inflation figures and a robust job market may encourage the Fed to move rates a little higher for longer in 2023. However, softening inflation and rising unemployment may cause the Fed to soften its approach to interest rates as 2023 progresses. However, December’s meeting is likely cap a very aggressive series of aggressive rate hikes from the Fed for much 2022.
"from" - Google News
December 06, 2022 at 07:15PM
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