Market Wire: Federal Reserve Hikes 50 Basis Points, Remains Steadfastly Hawkish
The Federal Reserve’s rate-setting committee raised benchmark rates by 50 basis points and lifted rate forecasts by more than expected - suggesting that officials are waiting for sustained and conclusive evidence of a downturn in inflation before executing the policy “pivot” markets have been hoping for.
At the conclusion of its last two-day meeting in 2022, the Federal Open Market Committee unanimously voted to raise the target range for the federal funds rate to 4.25-to-4.50 percent, with no dissents in favour of a smaller or larger move.
In the official statement setting out the decision, policymakers avoided telegraphing a slower pace of tightening in the months ahead, keeping language that previously alluded to “ongoing increases” in rates.
The accompanying Statement of Economic Projections showed officials now think the benchmark Federal Funds rate will peak around 5.1 percent by the end of 2023, up from 4.6 percent in September - well above market expectations that had been set closer to 4.8 percent. Seven of nineteen officials expect rates to climb above 5.25 percent before coming down.
Perhaps more critically, forecasts for the following year - 2024 - were raised to 4.1 percent, smashing market expectations for a sharper and deeper pivot.
Inflation is seen subsiding over time, with year-over-year increases in the core personal consumption expenditures index falling to 3.5 percent by the end of 2023 and 2.5 percent in the following year, up from the 3.1 and 2.3 percent previously forecast.
Growth forecasts were revised down, but the economy is expected to skirt a recession, expanding 0.5 percent in 2023, and 1.6 percent in 2024 - down from 1.2 percent and 1.7 in September. Unemployment rates are seen rising to 4.6 percent over the next two years - up from the 4.4 percent previously forecast for both years.
Markets tumbled in the moments after the release as traders raised forecasts for where interest rates might peak early in the new year. US equities slumped, two- and ten-year government bond yields rose, and the dollar fell.
Market focus is now shifting to the press conference, where Jerome Powell is expected to warn that it is too soon to declare victory over the inflation scourge, suggesting that rates need to climb further and hold for longer before any reversal can be contemplated. Traders will listen carefully for Powell’s views on the easing in financial conditions that has occurred since September, and particular attention will be paid to anything that clarifies how much economic weakness the Fed is willing to withstand before cutting rates.