The Fed has raised interest rates by 0.75 percentage points at the last three meetings. With the Fed’s September decision, two monetary policy decisions are now pending in 2022. These rate decisions are scheduled for November 2nd and December 14th. The Fed is free to set rates whenever it wants, but usually sticks to its meeting schedule unless economic news is extreme.
Both meetings are unlikely to surprise markets as both are expected to hike rates, which are expected to end the year around the middle of the 4% to 5% range for short-term rates. Nonetheless, comments on possible directions for 2023 will be closely watched, particularly with an update to the Fed’s economic forecasts and a press conference to accompany the planned rate decision in December.
No Fed meeting in October
First of all, no meeting is scheduled for October, although the minutes of the September meeting will be posted here on October 14th. These minutes could add more color to the Fed’s deliberations. The Fed typically holds eight policy-making meetings a year, so there are four months when the Fed does not meet. October is one of them.
November 2nd Fed meeting
The Fed will set rates on November 2nd. Fixed income markets are implying a 0.5 to 0.75 percentage point hike this session. That’s informed by a slew of October economic data. Most importantly, we will have a number of fresh data points on inflation such as: B. CPI, PPI and PCE inflation figures leading to this meeting.
Inflation data is important. Because while the Fed has a variety of metrics to monitor, inflation is by far the Fed’s primary concern right now. There will be no economic forecast update or press conference at the November meeting as this is only at every other meeting. Expect less color and more detail from the Fed at this December meeting.
Interpretation of upcoming inflation data
Lower is better given the upcoming inflation numbers ahead of the November decision. However, the Fed will tend to look beyond fluctuations in energy costs, which drive headline numbers, to determine underlying trends in the prices of goods and services such as housing, food, transportation and medical supplies.
The Fed has made it clear that these price trends, particularly the August CPI data released in September, still suggest US inflation is well above the Fed’s target of 2%. Today, annual top-line CPI inflation is roughly 8%, and around 6% when you take out more volatile prices or use other statistical techniques to arrive at the underlying inflation rates. In contrast, today PPI inflation is closer to 9% and PCE inflation is closer to 6% due to differences in measured values. However, all of this is well above the Fed’s 2% target.
The potentially good news is that the final quarter of 2021 saw some very strong US inflation numbers. If these numbers fall out of the 12-month inflation series in late 2022 and early 2023 and are replaced by lower monthly totals, the annual headline inflation figure could also fall quite sharply. That could give the Fed some air cover to ease rate hikes in 2023.
However, despite the worrying headlines, bond markets could be cautiously optimistic about inflation. There is an implicit expectation from both bond markets and inflation expectation surveys that inflation numbers will become more reassuring in the coming months.
The Fed has obviously not seen this data yet and remains cautious, not wanting to take unnecessary risks if inflation overshoots target for longer than necessary. The other side of the coin, of course, is that markets could be wrong here, and if they are, there could be even more pain for investors as 2022 comes to an end.
December 14 Fed meeting
Markets are currently expecting a 0.25 to 0.5 percentage point gain on December 14th. This leads to rates ending the year in a 4% to 4.5% range. On this, both financial markets and Fed policymakers’ forecasts seem to agree at the time of writing, although markets and at least one Fed policymaker see a slim chance that rates could hike a little higher.
December is far enough away that the Fed could change the plan a bit here, just as expectations for September rose to 0.75 percentage point from 0.5 as the meeting neared. There is some chance that the Fed will hike rates more than expected if pre-meeting inflation data does not overlay encouraging signals that inflation is beginning to ease. If that were the case, Fed officials would likely make more speeches and signal deep concerns about inflation ahead of the December meeting, similar to Federal Reserve Chair Jerome Powell’s August 2022 Jackson Hole speech.
If we see a really encouraging set of inflation numbers, the Fed could also make a smaller hike than expected, perhaps just 0.25 percentage point, although the market currently sees that as less likely. So the question really is the size of the hike for the December meeting. Based on its recent communications, the Fed is unlikely to get to the point where it intends to keep interest rates stable or cut them.
Forecasts for 2023
In December, the Fed will update its summary of economic forecasts and also hold a press conference, which could provide further clues as to how policy might play out in 2023 and how the Fed sees the odds of a US recession.
Currently, the Fed’s projections show a rise in unemployment, pointing to a strong possibility of a 2023 recession, and some policymakers are forecasting a 2023 recession more directly in their economic growth projections. With economic growth so far stagnant in 2022, there is also a possibility that the US is currently in recession. We will see the first estimate of US GDP growth for Q3 on Thursday 27th October.
The Fed may not change the script significantly as 2022 draws to a close. Central bankers are trying to avoid surprises and the Fed spends a lot of time steering the markets through its comments and speeches to keep things stable and predictable.
However, inflation data will be closely watched and will set the Fed’s playbook through 2023. In the final meetings of 2022, barring any dramatic surprises, cues from Powell and others will be to watch for how things play out in 2023 could .
The other side of the coin is recession risk. For now, the Fed is more concerned with fighting inflation as the US economy, and particularly employment, is reasonably strong. If that changes, the Fed will have more of a balancing act.
Finally, keep in mind that by this point the market has probably largely discounted further expected rate hikes in 2022. What would be more likely to move markets would be possible adjustments to the Fed’s plans or more details on 2023 where the market is less certain about how monetary policy will unfold.