Markets See A Smaller Fed Hike Coming In December

The Fed’s December meeting should be the first where they move away from the 0.75 percentage point rise in rates, that we’ve seen consistently at the past four decisions since June 2022. It is most likely, based on interest rate futures that the Fed increases rates 0.5 percentage points. However, pending economic data could sway things.

Recent Data

Recent inflation reports for November have come in lower than expected, but still well above the Fed’s target. We’ll also see another round of inflation data before the Fed meets. The Fed has made it clear that we are not yet out of the woods on inflation given one month of encouraging data.

Still, the Fed is getting closer to its target endpoint for interest rates. This is the level of interest rates that is sufficiently restrictive to control inflation, without the Fed needing to hike further. However, the Fed believes it may hold rates at this level for some time.

Where Are Peak Rates?

The Fed hasn’t said precisely what that level is. The market think peak rates will be a little under 5% and the Fed will hold rates there for the best part of 2023. Fed projections from the September meeting, which will be updated with the December decision, implied peak rates may fall in the 4.5% to 5% range.

Of course, current rates at 3.75% to 4% so we can expect perhaps one to three more hikes to get to these expected levels. The Fed have made it clear they are a lot more focused on where rates peak, and how long they stay at that level, than the precise path to get there.

December Meeting Timing

The final Fed meeting of 2022 will happen on December 13-14 with a rate decision coming at 2pm ET on December 14 and posted here. The press release will be followed by a press conference with Jerome Powell, the Fed will also release a summary of economic projections, which, among other things will update where the Fed sees interest rates heading in 2023 and the odds of a U.S. recession in the Fed’s view.

Recent Fed Statements

After encouraging inflation numbers for November, Fed officials were very quick to downplay any sort of victory lap on inflation. They emphasized that this was just one month of data and inflation was still way above target. However, the Fed has also been consistent in recent weeks that peak rates are getting closer. When they hit that level a pause is likely. For example, on November 14, Vice-Chair Lael Brainard said that hikes could slow soon. The Fed wants to stress that rates could remain hike for some time, but consistent rate hikes in 2023 are unlikely. The Fed almost has interest rates where they want them.

Key Data To Watch

Ahead of the December meeting, the Fed minutes from the November meeting will come later in November. This will add some color on the Fed’s recent thinking. Then the main economic data that will sway the Fed will be December’s inflation reports.

If inflation comes in much higher than expected, the Fed may be tempted to make another very big move in rates. The other key variable is the jobs market. For 2022 the U.S. jobs picture has been stronger than most expected. Recent data suggest unemployment may be changing, but the Fed would feel more comfortable about inflation if the jobs market were less tight.

The Fed has signaled that a pause in rates may be coming. December may be the first meeting where the Fed starts to make a series of smaller hikes as that point approaches leading to holding rates steady at around 5% in 2023.