Key Takeaways
- Fed largely expected to raise rates by 0.5%
- Some effects of past rate hikes starting to show
- Powell’s rhetoric will have to thread the needle
The Fed is about to lay all its cards on the table in the final FOMC meeting of the year next week (December 13-14). The Fed’s updated economic projections and dot plot as well as the Chairman’s press conference come at a critical time for the equity market as recent market movements have largely been driven by expectations for how aggressive the Fed still needs to be. In what is arguably the last major economic event of 2022, the financial markets will be monitoring how the Fed balances its focus on inflation (e.g., the increase in the terminal value of the fed funds rate) versus the risk of recession. Recent Fed member speeches appear to be more balanced as they have focused on this two-sided risk of raising interest rates, and investors hope the Fed signals it will turn the tables in 2023 with a rate cut.
Powell Won’t Table Further Aggressive Action In The Press Conference | The futures market has fully priced in a 50 basis point hike at next week’s December FOMC meeting, and we agree. Thereafter, we foresee a 25 basis point hike at both the February and March meetings. While the futures market reflects the Fed taking additional action from there, we think an evident slowing of economic momentum and a further easing of inflation will allow the Fed to take its foot off the gas. However, Chair Powell will likely try to afford the Fed some flexibility in his press conference. While he will acknowledge some of the growth concerns, particularly for areas of the economy that are showing clear signs of weakness (e.g., housing), he will also caution the market of prematurely assuming a ‘pivot’ in policy—especially since the futures market has a high probability of interest rate cuts at next year’s November and December meetings. Ultimately, this will be another test of how well Chairman Powell can thread the proverbial needle as he seeks to explain the two-sided risks of interest rate hikes and the difference between slowing the pace of hikes and ending the tightening cycle.
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