The Federal Reserve raised rates by 50 bp to a target range of 4.25-4.50% at their December meeting. The markets focused on the changes in the dot plot showing Fed funds finishing 2023 above 5% and hawkish revisions to the unemployment, GDP and inflation forecasts. A higher-for-longer scenario that continues in 2024 and 2025 dots. Stock markets sold off on the changes. Most officials project an unemployment rate rising to 4.6% or higher by end of 2023 and stays above 4% after that. A majority of FOMC participants see core PCE decelerating to 3.5% at end of 2023, vs a projection of 3.1% in September forecasts. Two officials see negative GDP growth in 2023. Most see the economy expanding 0.5% under appropriate policy.
The market was pricing in 97% for 50 bps with the terminal continuing to come down with 4.81% seen today in May. Year-end 2023 was priced for 4.288% including tail risks. It was a unanimous vote. The Fed repeats they are prepared to adjust policy as appropriate and are highly attentive to inflation risks.
Federal Reserve FOMC Statement
Federal Reserve Announcement Wednesday 2 November 2022 14:00:00 ET
The FOMC raised the target rate by 50 basis points 4.25-4.50% from 3.75-4.00%
Conference To Follow At 2.30 ET PM With Chairman Powell
Highlights
- Decision was unanimous for raise
- The prior guidance said: “The Committee anticipates that ongoing increases in the target range will be appropriate” and that was repeated.
- Recent indicators point to modest growth in spending and production, unchanged from prior statement
- Job gains have been robust in recent months, and the unemployment rate has remained low.
- Inflation remains elevated
- Repeats that the Committee is highly attentive to inflation risks
- On the Ukraine war, says “events are contributing to upward pressure on inflation” vs “events are creating additional upward pressure on inflation”
FOMC dot plot and central tendencies
EOY 2023 4.8
- The dot plot from December 2022 shows the median rate at the end of 2023 at 5.1% vs 4.6% at the September 2022 projection
- For 2024, the median fed funds target rate is 4.1% versus 3.9% in September
- For 2025, the median fed funds target rate is 3.1% versus 2.9%
Market Reaction After FOMC
The US dollar moved Higher
- USD/JPY: 135.63. EUR/USD: 1.0642 up from USD/JPY: 134.98. EUR/USD: 1.0670
Stocks lower
- US equities sold off after the FOMC’s rate decision. The benchmark S&P 500 fell about 80 points off this afternoon’s highs.
Interest rates rose especially in shorter tenors
U.S. Treasury yields across the curve moved higher following the FOMC decision with the yield on the benchmark 10-yr note now down about 8 bps to 3.545%.
Yields Higher After Release on Day:
- 2-yr: +7 bps to 4.28%
- 3-yr: +6 bps to 4.01%
- 5-yr: +5 bps to 3.70%
- 10-yr: +4 bps to 3.54%
- 30-yr: +3 bps to 3.55%
Prior to release:
- 2-yr: -3 bps to 4.18%
- 3-yr: -4 bps to 3.91%
- 5-yr: -1 bp to 3.63%
- 10-yr: +1 bp to 3.51%
- 30-yr: +5 bps to 3.58%
December 14 FOMC STATEMENT CHANGES via @Newsquawk
The lines of note that change FOMC: “In determining the pace of future increases … the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The full statement from the December 2022 Fed Decision
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.
Implementation Note issued Dec 14, 2022
Source: Federal Reserve
From the TradersCommunity Research Desk