Fed Now Sees Rates Topping 5% In 2023

In recent months U.S. inflation has broadly trended lower, despite remaining elevated in historical terms. Despite this, the Federal Reserve’s updated projections for December show that the majority of policymakers expected rates to exceed 5% in 2023. In contrast, the last time the Fed shared projections in September, no policy-maker saw rates exceeding 5% in 2023.

December Decision

The Fed’s decision to raise rates 0.5 percentage-points at its December meeting was broadly expected. This was a slower pace of hikes than the 0.75 percentage-point moves we’ve seen for many meetings in 2022.

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The more interesting angle was the Fed’s provision of economic projections for 2023 and beyond, including forward-looking assessments of the level of short-term interest rates.

Hikes Into 2023

It appears that peak interest rates will fall in the 5% to 5.5% range for 2023 on the Fed’s latest projections. That implies a few more hikes in interest rates in early 2023, though likely fewer and significantly smaller moves than we’ve seen in 2022.

The markets are broadly on the same page with the Fed’s assessment. Interest rates futures imply a likelihood of more hikes in early 2023, but the Fed most likely holding rates steady by spring in the central case.

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Over the medium term, the Fed expects short-term rates to move lower in 2024, though the range of outcomes is broad. Rates should then fall further, on the Fed’s estimates, returning in 2025 to around 2.5% over the longer run. Supporting these interest-rate scenarios, PCE inflation is expected to remain slightly above target at around 3% for 2023, but return to closer to 2% in 2025.

Inflation Skepticism

These recent projections make clear that the Fed is not fully convinced by the calming of inflation since the late summer. The Fed worries that wage pressures in the U.S. economy will continue to push up prices and that the recent run of broadly positive inflation numbers may not be sufficient to suggest that inflation will move back to 2% without higher rates for longer from the Fed.

Inflation may have peaked in the U.S. but the Fed isn’t ready to stop raising rates just yet.

Source: https://www.forbes.com/sites/simonmoore/2022/12/14/fed-now-sees-rates-topping-5-in-2023/