Fed Expected to Keep Peak Rates for Longer, Dashing Hopes for 2023 Cuts
The Federal Reserve is set to disappoint Wall Street as it keeps rates at their peak throughout 2023, dashing hopes markets have priced in for rate cuts in the second half and making a recession very likely.
That’s the forecast of economists surveyed by Bloomberg ahead of a decision and forecasts due from the Federal Open Market Committee on Wednesday. Policymakers will raise rates by 50 basis points next week, following four consecutive 75 basis-point hikes, and by quarter points at the following two meetings, the survey found. Policymakers will announce their decision and forecasts at 2 p.m. in Washington.
The FOMC’s median projection is expected to show the policy benchmark peaking at 4.9% in 2023 — reflecting a 4.75%-5% target range — compared to 4.6% seen in September. That would deliver a hawkish surprise to investors, who currently bet that rates will be cut by a half percentage point in the second half of next year, though they too see rates peaking around 4.9%.
The survey saw the Fed cutting rates to 4% by June 2024 and to 3.5% by the end of that year.
Chair Jerome Powell has said he’s willing for the economy to suffer some pain to lower inflation near 40-year highs and that should be a bit more visible in the new forecast.
The Fed’s summary of economic projections are likely to show that policy makers are looking for weaker US growth and slightly higher unemployment than they were expecting in September. They may downgrade 2023 growth estimates to 0.8% compared to 1.2% in September while seeing unemployment rising to 4.6%. The US jobless rate stood at 3.7% last month.
What Bloomberg Economics Says
“The Fed has signaled the terminal rate will likely be around 5% — we think an upper bound of 5% — reached in early 2023. To get there, the central bank will likely raise rates by 50 basis points at its December 2022 meeting, followed by two more 25-bp hikes in 2023. We then see it holding at 5% throughout the year.”
—Anna Wong and Eliza Winger (economists)