Fed Raises Interest Rate Half Percent - What's Next?
The Federal Reserve on Wednesday raised the interest rate a half a point matching most analyst expectations. The increase is lower than the 75-point basis the agency has raised rates in the last four meetings, an indication that inflation is beginning to ease. After two days of meetings, the Fed is still trying to slow down economic growth and fight off inflation.
Since the mark was nearly zero ten months ago, the rate has increased the amount banks charge each other to 4.25-4.5% which is the highest since 2007 and the rate hikes have been the fastest since the early 1980s.
2022 Federal Reserve Rate Increases:
March 17: 0.25 percentage point
May 5: 0.50 percentage point
June 16: 0.75 percentage point
July 28: 0.75 percentage point
September 22: 0.75 percentage point
November 2: 0.75 percentage point
December 14: 0.50 percentage point
The slowdown in rate hikes combined with a lower-than-expected CPI figure (7.1 versus 7.3 expectations) announced Monday should be good news for the markets, however, we failed to see a rally after the two positive developments. But why? As it has done a lot lately, the Fed put a damper on things. In September, all indications were that the interest rate would peak in the 4.5% to 4.75% range in 2023, however, they revised that range to 5% to 5.25%. This news was not welcomed by investors whose displeasure was seen in falling market prices. The hopes for a "Santa Rally" were dashed away and more market downward pressure could fallout in the coming weeks.
As for the overall economy, the Fed also revised its estimates to a 0.5% growth rate for 2021 and expects about the same next year. This is down from their September prediction of a 1.2% growth rate in 2023, more sour news. Most economists are forecasting a recession in the coming year, albeit of the "mild" variety. The Fed also released they expect inflation to stand at 3.1% by the end of next year, well above its targeted inflation rate of 2%.
Fed Chairman Jerome Powell spoke to the media at 2:30pm EST following the meeting and answered questions about potential future rate hikes.
To the extent we need to keep rates higher and keep them there for longer inflation ... I think that that narrows the runway, but lower inflation readings, if they persist in time, could certainly make it more possible.
Jerome Powell, December 14, 2022
As for the potential for a recession next year and the level of a potential recession, the Fed Chairman had thoughts on that as well.
I just don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not ... it’s not knowable.
Jerome Powell, December 14, 2022
His comments were not reassuring to an already concerned investor base.
The latest news from the Fed drove the S&P quickly down about 20 points or 0.5% which matched the fall of Ethereum (ETH) with Bitcoin (BTC) falling even harder right after the news release. The Dow Jones Industrial Average faired better while the tech-heavy NASDAQ-100 was hit the hardest dropping nearly a full percent.
Looking ahead to 2023
So what will the Fed do next year? Unless inflation figures jump much higher than expected to kick off the new year my guess is that the Fed will do one more rate hike in their next meeting before easing off the rest of 2023. I don't think the Fed will raise the rate by more than half of a point, with a quarter of a point even more likely settling right around the 5% mark.
Federal Reserve 2023 Meetings:
March 21-22
May 2-3
June 13-14
July 25-26
September 19-20
October 31-November 1
December 12-13
Keep an eye on the US labor market which has remained on fire with another 263K jobs added last month. I think Jerome Powell and company will watch the unemployment figure closely, only trailing inflation numbers in terms of importance. The overall economy is of utmost importance and hard to predict due to unforeseen global macroeconomic news. What will happen with the war in Ukraine? Will COVID raise its ugly head once again? Will supply chain issues persist throughout 2023? What new driving forces will hit the world economy next year?
It is a murky outlook for sure. Historically, most indicators would suggest we are near or at the bottom of the current crypto bear market cycle. The problem is, we have never seen a crypto bear market during a global bear market so how well with past trends hold?
I remain very cautious looking ahead but remain optimistic looking long-term. Don't expect big gains in the near term and accumulate assets for the long-haul expected price appreciation is probably the best strategy in the current crypto environment.
I am no economist, but I think we are already in a bit of a recession and that one is almost certain in 2023. I also think we kind of need it in order to really get this inflation knocked out—similar to what Reagan and the Fed had to do back in the 80's, the last time we saw terrible inflation numbers like these.
More than anything, I do not think that the Biden administration is focused enough on the economy and on the inflation issue to effectively pursue policies and restraints in government spending to help the process along. Certainly, they have no interest in fixing the gas price at the pump issue either, which is helping to strap already strapped people more and adds to inflation because it is such a big part of the cost of moving goods around.
I agree with Powell, though, and happy to hear him admit that trying to predict what the economy will do is a really tough call—and it's not knowable.
While consumer spending DOES seem to finally be showing SOME sign of slowing down, it is interesting to me that it seems more apparent in non-discretionary spending rather than discretionary. People are still spending on discretionary things and that is an interesting dynamic I think.
People are still taking vacations and spending on dining out and buying new cars etcetera. Some of that I attribute to what I call "Covid fatigue." In other words, people were locked up for too long and restricted for too long and regardless of whether or not they have the money, they simply want to do things.
That is partly indicated too in the massive increase of personal debt over the last 12-18 months which is of course attributed to inflation, but also to a lack of care or concern for holding more debt to do what they want despite inflation and anything else happening economically right now.
Interesting article.