A downshift in hikes but more to come in 2023
Hedging and Capital Markets
Real Estate | Kennett Square, PA
On Wednesday, December 14, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 50 basis points to 4.25–4.50%. This rate hike is guided by their long-term dual mandate of price stability while simultaneously ensuring maximum employment. The Fed is committed to lowering inflation to their 2% target range and believes they have future hikes in 2023 in order to achieve this goal. The Fed’s new projection for rate hikes price in a median rate at 5.1% and is not pricing in any rate cuts for 2023. Chair Powell stated that inflation is entering 2023 higher than initially anticipated, so the board increased their expectations for their peak rate.
- The Federal Reserve unanimously voted to raise the Federal Funds target rate by 50 bps to a target range of 425–450 bps. This is their first hike of this cycle where they are reducing the magnitude of the hike.
- The committee anticipates that ongoing increases in the target range in 2023 will be necessary to bring rates to a restrictive level to battle inflation.
- Fed’s median forecast shows rates in 2023 at 5.1% vs. 4.6% in the September projection. This is partially due to 2022 ending with higher inflation than the board previously anticipated.
The Federal Reserve voted unanimously to increase the federal funds target range by 50 basis points, the first deceleration in the pace of rate hikes this cycle. The Federal Reserve updated their projections for the federal funds target range with the median projection for end of year 2023 increasing to 5.10% from 4.60%. The Federal Reserve remains highly attentive to inflation and is focused on ensuring it does not become entrenched in the U.S. economy. The board remains cautious to not repeat historical inflation mistakes by ending hike cycles prematurely. Powell noted the board is not focused on the speed of rate hikes but rather the peak of the hikes needed. He stated this is because the board acted quickly with rate hikes and now sees the opportunity to take more measured actions. Chair Powell also noted that the housing sector is a leading indicator showing the impact of rate hikes, but the board is attentive to other inflation pressures that are not reacting as quickly.
Impact on rates
The board remains hawkish in its approach to rate hikes and believes we have “some ways to go” to achieve their dual mandate initiative. The board will continue to raise interest rates until they see evidence through data releases that inflation is on a sustainable path towards their 2% target. The board also noted that inflation is higher than previously anticipated, and the board is not currently expecting any rate cuts in 2023.
As seen above, interest rate cap prices are slightly less expensive than the November Fed meeting. This is due to the decrease in market expectations for the peak of rates.
As seen below, the expectations for rate hikes decreased since the November meeting, and the rate cuts priced in are more severe.
The Federal Reserve is attentive to inflation and incoming data which could impact their monetary policy moving forward. Chair Powell stated the board does not expect to begin rate cuts until 2024, but that could change with more data. After the meeting, the market is pricing in a greater than 58% probability of a 25-basis-point hike and a 36% probability of a 50-basis-point hike at the February 2023 meeting. Floating-rate borrowers can expect consistent increases in interest rates in the near term as the Federal Reserve focuses on battling inflation.
Chatham’s expert advisors and technology are core to helping our clients hedge their interest rate risk. To follow the developments of the market’s expectations of the forward curve visit Chatham Rates or subscribe to our newsletter below.
Subscribe to receive analysis and insights regarding the Federal Reserve policy updates
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0091
Our featured insights
BoE and ECB keep rates on hold, but rate cuts grow more likely
The Bank of England (BoE) voted to keep rates on hold as expected at 5.25%, though one member of the Monetary Policy Committee (MPC) voted for a rate cut, the first vote since the Bank cut rates to a record low in March 2020. Two members voted to hike rates, but a subtle change in the...
Fed maintains rates level while the market looks ahead to easing cycle
On Wednesday, January 31, 2024, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25% – 5.50%. The FOMC made a few notable changes to its first statement of the year. Importantly, while acknowledging that the Central Bank’s employment and...
Major central banks hold rates steady; markets price in rapid cuts
The Bank of England (BoE) held rates for a third consecutive meeting at 5.25% with a vote of 6–3. The bank rate remains at the highest level since the financial crisis, amidst the backdrop of inflation more than double the Bank’s target and a stagnating economy. The latest data shows the U.K....
Fed holds rates steady; three rate cuts forecasted in 2024
On Wednesday, December 13, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25–5.50%. Today's pause represents the third straight FOMC meeting with no change in the policy rate after hikes in 11 of the 15 prior meetings and a...
Expert Conversation with Matt Henry and Rob Kaplan
Matt Henry, Chatham's Managing Partner and CEO, and Rob Kaplan, former President and CEO of the Federal Reserve Bank of Dallas, discuss the economy, alternative capital sources, interest rates, and more.
BoE holds rates steady again while ECB pauses record run of hikes
The Bank of England (BoE) kept rates on hold at 5.25% for a second consecutive meeting today, as it attempts to balance a weakening economy with inflation that is still measuring three times its target. The Bank's updated forecasts show medium-term inflation slightly higher than in August's...
Jackie Bowie discusses the Bank of England's interest rate decision on Sky News
Business Live host Ian King interviews Jackie Bowie about the Bank of England's November interest rate decision. Will the decision follow the consensus of pausing the interest rate hike, or will the Bank continue rising?
Fed holds rates steady while noting tighter financial conditions
On Wednesday, November 1, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%. Today's pause represents consecutive FOMC meetings with no rate change, having hiked in 11 out of the last 14 prior meetings. The most notable...