When To Expect The Fed To Raise Rates Again In 2023

Markets expect the U.S. Federal Reserve (Fed) to raise rates again on February 1, 2023, probably by 0.25 percentage points to 4.5%-4.75%. However, there’s a reasonable chance the Fed opts for a larger 0.5 percentage point hike. The February decision is the first of eight scheduled meetings for the Fed to set interest rates in 2023.

Inflation Worries

Markets expect the Fed to continue to raise rates early in 2023, due to inflation concerns. Recent data has shown that U.S. inflation is declining. After topping a 9% annual rate in June, November CPI showed inflation at 7%. Still, that recent decline in the rate of inflation is insufficient in the Fed’s view.

The Fed wants inflation to return to their 2% goal, and even though inflation is declining, it’s still high in absolute terms and there’s a risk inflation doesn’t fall cleanly all the way to 2%. For example, the Fed is concerned that wage growth running at around 6%, will continue to keep inflation high in services, even if costs for housing and goods are expected to be more subdued in 2023. Another risk, is that an unexpected economic shock pushes inflation higher again in a similar manner to the Ukraine war or supply chain disruption.

A Robust Jobs Market

Part of the reason that the Fed was able to be so focused on inflation-fighting with higher rates in 2022 was because the rest of the U.S. economy performed reasonably well.

U.S. unemployment ranged between 3.5% and 4% for 2022, which is low by historical standards. The Fed’s fear about raising rates is that they could cause a U.S. recession. However, the relatively hot jobs market has meant that the Fed hasn’t worried too much about the side-effects of high rates from their inflation battle.

Yes, house prices have declined recently, and both stock and bond markets have had an unusually weak 2022, but these aren’t the Fed’s main concerns. The Fed’s mandate is to control inflation and maintain high employment. With employment reasonably healthy, the Fed can fight inflation without having to worry too much about trade-offs, at least at this point.

Incoming Data

A rate hike in February does seem likely based on the Fed’s recent statements, however inflation reports for the month of December will be released in January and will inform the Fed’s view. For example, CPI inflation for December 2022, will be announced on January 12, and unemployment for December will be announced on January 6. This data is unlikely to shift the Fed’s position for February, but could change the trajectory for interest rates for the March and May meetings.

The Path For Rates In 2023

Later meetings of 2022 saw repeated and large interest rate hikes. 2023 is currently expected to be different, markets expect a few smaller hikes earlier in the year, but rates could then hold steady for much of 2023, or even fall.

Markets see a reasonable chance that March represents the final hike of this interest-rate-cycle for the Fed. However, that would require continued favorable news about falling inflation and perhaps some cooling of the jobs market. Even so, the Fed is currently committed to high rates for 2023, so even if rates aren’t increased after March, the Fed may leave rates high for most of 2023. Unfortunately, the main thing that could change that and bring rates lower is a U.S. recession.