US Federal Reserve went for an unprecedented series of rate hikes in 2022. From near-zero rates, the FRR – Federal Funds Rate – reached 4.25% by December of last year. The Funds target range increased to 4.25%–4.5% in December 2022, the highest level in 15 years, marking the conclusion of a streak of four straight three-quarter point hikes.
The next FOMC rate hike announcement is on February 1 at 2:00 PM ET, and, thereafter, Fed Chair Powell will hold a news conference. The Fed’s economic forecasts won’t be updated at this time which will happen at its meeting in March 2023. Investors anticipate that the Fed will increase that rate by 0.25 percentage points at the conclusion of its meeting from January 31 to February 1.
Before the Fed pauses or starts cutting rates, the Federal Open Market Committee (FOMC) is expected to raise the terminal fed fund rate to 5.00% – 5.25%.
Stock market investors are aware that Fed will slow down the pace of rate hikes but will eventually end up with a higher terminal rate. US CPI inflation that had peaked and crossed multi-decade high levels started to fall and by December, the annual inflation came down to 6.5%. The market also knows that Fed may not want to act fast and start cutting rates unless inflation is controlled in its entirety. Any uptick in inflation after a rate cut may be more damaging to the economy as well.
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Already inflation making a comeback is doing the rounds. ‘Big short’ fame investors Michael Burry in a recent tweet says that inflation is likely to lower CPI in 2H 2023 and the US could be in recession by then. This scenario will lead Fed to cut rates and the government to infuse liquidity to stimulate the economy which could untimely lead to another spike in inflation.
Meanwhile, it is expected that the fed fund rates will remain high throughout 2023, with some forecasting that rate decreases will begin at the end of 2023 rather than in 2024. But no member of the FOMC expects rate reductions in 2023, according to estimates made in conjunction with the meeting that took place on December 13–14, and Fed officials’ expectations for 2024 and beyond are less consistent. Those hoping for Fed Pivot and a cut in interest rates will likely have to wait a bit longer.
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Mirae Asset Mutual Fund in a recently published report titled, ‘Insights on Passive Investment’ talks about the way forward for US Fed amidst inflationary concerns – As the committee becomes firmly convinced that inflation is declining on a sustainable basis towards back to 2% and as the unemployment rate nears 5%, the market anticipates that retrenchment of interest rate might be in sight by early 2024. However, it is unlikely that FOMC will start easing policy at the first sign of weakness, a stance that they had adopted in prior cycles.
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