Today the Fed raised rates 0.75% as broadly expected in a consensus decision, backing away from a 1% rise that was an outside possibility. With three remaining meetings on the calendar for 2022, here’s what the market currently expects.
Of course, the Fed can always move rates outside of its scheduled meetings, though that’s often only done when the economic news is extreme.
September 21 Fed Meeting
Skipping an August meeting, having met in late July, the Fed’s next scheduled monetary policy meeting takes place on September 20-21. At that point, we will have more data on how inflation is trending and how the jobs markets and overall economy is looking. The Fed would hope to see inflation soften, and the job market hold up. Of course, that may not happen.
Market expectations are currently broadly split between a 50bps and 75bps hike, with an outside chance of a 100bps move. If inflation trends higher from its current 9% level and the job market remains robust, then a 75bps move, or greater, is more likely.
However, if signs of recession mount and inflation trends down, then the Fed may moderate any increase. However, currently the question for this meeting is the size of a rate hike, rather than the direction the Fed will move in. This meeting will also see some greater disclosure from the Fed including the latest economic projections as occurs at every other Fed meeting.
November 2 Fed Meeting
Then the Fed plans to skip the month of October before setting rates in early November. Here as we move further out, the decision is a little more uncertain, though similar to the September meeting a 50bps or 75bps hike appear the most likely outcomes, based on market futures.
Should that occur, this is the meeting that would take short-term rates over the symbolically importantly level of 3% which could well push the yield curve into deeper into inversion – an important recession signal. However, the actual inversion would likely occur in the lead up to the meeting as shorter term rates factor in a likely rate move, and assume no big shift at the longer end of the yield curve.
The 3% level would also be significant, in putting rates back to where they were more than a decade ago back in 2008, since immediately before the pandemic, rates never quite hit the 3% level. Hence the period of easy money that has persisted in America for many years may appear to be over if the November meeting goes as planned.
December 14 Fed Meeting
Then the last scheduled meeting of the year in mid-December is expected to see a smaller hike. The market sees some chance that either inflation as softened or the economy has weakened sufficiently by December that the Fed holds rates steady at this meeting.
However, the most likely move in the market’s view is perhaps a 25bps move up in rates. This is where the markets believe that recession risks may prevent the Fed from moving too strongly against inflation. Or, in a more optimistic interpretation, maybe inflation will be trending lower without too much economic weakness, thought that seems less probable.
Looking Ahead To 2023
However, 2023 is where it really gets interesting. This is far enough out that the Fed will have had time to adjust to significant economic data between now and then with the first 2023 rate decision slated for February 1.
There is a chance that the Fed remains on its path of raising rates by this meeting. However, the market sees the chance of that as fairly small, both in terms of the chance of a hike and its size, which could be around the more typical 25bps moves the Fed has made historically.
The market seems to believe that rates are likely to hold steady at this meeting, with a balance of risks between inflation continuing to be a concern and the economic environment moving closer to, or possibly well into, a recession.
So as an summary of the Fed’s likely moves, September may see more of the same from the Fed, with perhaps another very large 75bps ‘inflation busting’ move up in rates. However, a smaller increase in November is then expected, and by December and into 2023 the market sees some chance that the Fed is either holding rates steady or just making 25bps moves up in rates.
Of course, this is essentially a mirror to the economic data the market expects. The market sees inflation moderating, though maybe not as much as the Fed would like, but a real risk of recession on the horizon.
By the end of this year and into next the market is betting that recessionary fears will begin to offset the Fed’s inflation-fighting energy. However, there is still a great deal of economic data to come between now and then, with the three key metrics to watch being inflation, the job market and economic growth. The market sees a recession as likely, but believe the Fed will still move rates higher than we’ve seen in over a decade during the remainder of 2022.