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What To Expect From The Final Fed Rate Decision Of 2022

2022 has been a dramatic year for rate hikes from the U.S. Federal Reserve (Fed), and there is still one meeting to go. We’ll likely see another hike, but whether its 0.5 or 0.75 percentage points hangs in the balance, according to futures markets. The decision is scheduled for 2pm ET on Wednesday December 14.

Upcoming Data

There’s lot of economic data to come before the meeting, this will shape the December decision. The main things to watch are inflation and employment.

Inflation Data

The first is November’s inflation announcements including PPI, CPI and PCE data. Of course, U.S. inflation has been running well ahead of the Fed’s goal.

Unfortunately, forecasts of November’s inflation do not look encouraging. If these forecasts hold, they may cause the Fed to be tempted to move to a larger 0.75 percentage point rate hike, as inflation continues to run hot. However, it may be that inflation comes in lower than projected or the Fed sees some early hints than inflation may come down within the detail of the report.

Jobs Data

Then we’ll also see various updates on the jobs market, perhaps the most important here being the Employment Situation Report on December 2. So far the jobs market has been stronger than most expected for 2022, but the most recent jobs report could have been the first signs of weakness.

If the job market starts to weaken, that would concern the Fed. Maintaining U.S. employment is part of their mandate, just as much as managing inflation is. A weakening jobs markets may also be a sign that the rate hikes of 2022 are being more broadly felt across the economy, beyond the softness we’re already seeing in housing. Weakening employment data may cause the Fed to be more inclined make a slightly smaller move and hike rates 0.5 percentage points.

Upcoming Speeches And Meeting Notes

The November rate hike was a large and unanimous 0.75 percentage point increase in rates from policy-makers. However, the Fed has noted that it is likely approaching the maximum level of interest rates that it wants to see. Setting rates too high for too long, may cause unnecessary pain and, would start to materially increase the cost of servicing the relatively large national debt.

The minutes from the November Fed meeting and speeches from policy-makers may help shed light on where peak rates will land this cycle. The Fed still wants restrictive monetary policy, but it may achieve that by holding rates at a high level and waiting for the economic consequences, rather than a less sophisticated approach of continually raising rates until inflation falls.

The Path For Interest Rates

The key question here is how high the Fed wants rates to go in 2023. If December sees a 0.75 percentage point increase, that’s a signal that interest rates may top out at 5.5% or higher. However, if the December decision is a 0.5 percentage point hike or lower, then peak rates for this cycle may come in closer to 5%.

Either way it’s a fairly narrow band of outcomes for interest rates. Futures markets don’t see much chance that short term interest rates hit 6%. Markets are watching to see what the level of peak rates is and how long those rates are held for. Currently it expects rates to be held at around 4.5% to 5.5% for much of 2023. There’s a broad view that after the December meeting we should be at, or close to, peak interest rates for this cycle.

Decoding the Decision

The December 14 interest rate announcement will also offer additional color on the Fed’s thinking. In addition to the press release, Jerome Powell will give a press conference and the Fed will share it’s projections for economic variables over the coming years, including where it expects interest rates to end 2023.