If that changes, the Fed will have more of a balancing act.įinally, bear in mind that the market has likely largely factored in further expected rate hikes in 2022 at this point. economy, and especially the employment situation, is reasonably strong.

For now, the Fed cares more about fighting inflation as the U.S. The other side of the coin is recession risk. In the final meetings of 2022, unless there are dramatic surprises, the thing to monitor will be hints from Powell and others as to how things may play out in 2023. However, inflation data will be very closely watched and determine the Fed’s playbook into 2023. Central bankers aim to avoid surprises, and the Fed spends a lot of time steering the markets through its comments and speeches to keep things steady and predictable. The Fed may not change the script much as 2022 draws to a close. is in recession currently, given stagnant economic growth so far in 2022. recession.Ĭurrently the Fed’s projections are showing an increase in unemployment that suggests a strong chance of recession in 2023 and a few policymakers are forecasting a 2023 recession more directly in their economic growth projections. In December the Fed will update its Summary of Economic Projections and hold a press conference, too, which may provide more clues on how policy may evolve in 2023 and how the Fed sees chances of a U.S. It’s unlikely the Fed, based on its current communications, would get to the point where it wants to hold rates steady or drop them. As such, the question really is the size of the hike for the December meeting. If we see a really encouraging run of inflation numbers, the Fed may also deliver a smaller hike than expected, perhaps just 0.25 percentage points, though the market currently views this as less likely. If that were the case, the Fed officials would likely make further speeches, signaling major concern about inflation in the run-up to the December meeting along the lines of Federal Reserve Chair Jerome Powell’s August 2022 Jackson Hole speech. There’s some chance the Fed delivers a larger hike than anticipated if the inflation data in the run-up to the meeting doesn’t over any encouraging signals that price rises are starting to ease. This is something both the financial markets and Fed policymakers’ forecasts appear to agree on at the time of writing, although the markets and at least one Fed policymaker do see a small chance that rates could move a little higher.ĭecember is far enough away that the Fed might change the plan a little here, just as September expectations nudged up from 0.5 to a 0.75 percentage point hike as the meeting neared. This works out to rates ending the year in a range of 4% to 4.5%. Markets currently anticipate a 0.25 to 0.5 percentage point move up on December 14. Of course, the other side of the coin is that markets could be wrong here and if they are, there could be more pain for investors as 2022 draws to a close. The Fed obviously has not seen that data yet, and remains cautious because it doesn’t want to take unnecessary risks on inflation running ahead of target for longer than necessary. There is an implied expectation from both fixed income markets and inflation expectation surveys that the inflation numbers will become more reassuring over the coming months. However, despite the worrying headlines, fixed income markets may be guardedly optimistic on inflation. That may provide a bit of air cover for the Fed to ease off on rate hikes in 2023. If these figures drop out of the inflation 12-month series in late 2022 and early 2023, and are replaced by lower month-on-month totals, the overall annual inflation number may also fall fairly sharply. The potentially good news is that the final quarter of 2021 did see some very high U.S. Still all of these are far above the Fed’s 2% goal. In contrast, PPI inflation is closer to 9% today, and PCE inflation is at 6% given differences in what is being measured.

Today we have annual topline CPI inflation broadly at 8% and around 6% once you strip out more volatile prices or use other statistical techniques to get to underlying inflation rates. The Fed has been clear that these price trends, especially from the August CPI data released in September, still imply U.S.

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