La Française: No victory lap yet, but some relief

La Française: No victory lap yet, but some relief

14 december 2022

Fed
Federal Reserve Washington.png

By François Rimeu, Senior Strategist, La Française AM

It is widely expected that the Federal Open Market Committee (FOMC) will slow down hike rates from 75 basis points (bps) to 50 bps at its December meeting. The Federal Reserve will update its Summary of Economic Projections (SEP) which will indicate lower growth and higher inflation for 2023. We expect the dot plot to show a higher terminal rate at 5.1% in 2023 which implies a range of 5%-5.25%.

Please find below what we expect:

  • The FOMC to hike rates by 50 bps to a range of 4.25%-4.50%.
  • Mr. Powell will repeat that future policy rate decisions will continue to be dependent on incoming data. More specifically monetary policy should focus on the labor market dynamic and wage growth consequences on services inflation (less housing component).
  • We do not expect Chair Powell to provide explicit guidance about the rate move in February, leaving options open for another 50-bps hike, a further downshift to 25 bps or even doing nothing at that meeting.
  • Jerome Powell to postpone the possible pivot on monetary policy to 2023.
  • On the side of the dot plot, we expect to see the median dot up from 4.6% to 5.1% in 2023 given the resilience of the U.S. labour market. We do not exclude seeing one or two dots at 5.4%. By then, Fed policymaker projections will show the first rate cuts in 2024 with the median rate at 4.1% which will show dispersion in Fed members’ opinions.  The median dot will converge toward the median longer-term neutral rate (2.5%) at 2,9% in 2025.
  • On new economic projections, we expect them to indicate higher growth in 2022 (from 0.2% to 0.5%) but lower GDP in 2023 (from 1.2% to 1,0%) and 2024 (from 1.7% to 1.6%). For 2025, we expect growth will stay close to potential growth at 1.8%.
  • We anticipate the committee to revise upwards its 2022 inflation forecast (Personal Consumption Expenditure, PCE) from 5.3% to 5.6% in 2023. We expect median inflation expectations will be unchanged in the next two years, at 2.3% in 2024 and 2.0% in 2025.

All in all, the Fed will conclude its last meeting of the year by a slower pace of rate increases which is justified by cumulative tightening and lags. The November CPI which was lower than expected is good news for the Fed even if it does not mean that the inflation fight is over considering the high level of wage inflation in the services sector in the US. But it will allow Mr. Powell to indicate that policy tightening is already having positive effects on the economy and that there is no rush now to overtighten. Considering the strong market reaction following the Inflation print and the fact that Mr. Powell will in our opinion insist that the fight is not over, rates could be somewhat higher after the press conference.

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