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United States Monetary Policy December 2022

United States: Fed dials hikes back to 50 basis points in December

At its meeting on 13–14 December, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 50 basis points to 4.00–4.50%, following four successive 75 basis-point hikes.

The decision to hike was aimed at containing price pressures. While inflation fell by more than markets expected in October and November, it remains more than triple the Central Banks 2.0% target. The tight domestic jobs market—labor demand is currently well in excess of labor supply, the unemployment rate is close to its pre-pandemic level and wage growth is running above 5% year on year—provided a further reason to hike.

Looking forward, the Fed reiterated that “ongoing increases in the target range will be appropriate”. In its accompanying report, Federal Reserve officials projected that the target range would be at 5.00–5.25% at end-2023. This is slightly above our Consensus, which is for the upper bound of the target range to be hiked to close to 5% by mid-2023 before some monetary easing in H2 2023. That said, there is a notable discrepancy in panelists views, with minimum and maximum forecasts for end-2023 of 3.25% and 5.25% respectively. Much will depend on the pace of the decline in inflation, and the degree to which excess labor demand dissipates.

Giving their take on the outlook, analysts at Goldman Sachs said:

“We continue to expect three additional 25bp rate hikes in February, March, and May, for a peak funds rate of 5-5.25%. We do not think that Powell meant to send a strong signal about the size of the next hike in February [ …], but we see his intention to ‘feel our way ‘ to the appropriate policy rate as most consistent with our forecast of another stepdown in the pace to 25bp.”

Analysts at Scotiabank are more dovish:

“We continue to expect that the Fed will lift rates to 5% early next year before eventually beginning rate cuts late in 2023. A series of additional cuts are expected in 2024.”

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