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Market Update

A downshift in hikes but more to come in 2023

December 14, 2022


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.

Key takeaways

  • 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.

FOMC recap

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.

Moving forward

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.

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