Often it comes down to a few words in the Federal Reserve’s press release. With its November statement, the Fed has offered an early signal that we may be getting closer to peak interest rates of around 5%. The Fed anticipates moving toward smaller rate hikes either in December or at the subsequent meeting in February 2023. However, Fed Chair Jerome Powell did indicate at the November press conference that it was “very premature” to be talking about a pause in rising rates. We’re not there today.
The Fed increased rates 0.75 percentage points on November 2. That’s a relatively aggressive move consistent with recent meetings. However, the Fed is discussing what it would take to ultimately ease off on rate hikes. It’s not stopping rate hikes yet, but it may well do so in the first half of 2023.
Change In Fedspeak This November
The Fed has now moved to more caveated language, here’s the relevant part of the Fed’s November 2 press release.
“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.”
Previously, such as at the September meeting, the Fed merely said that it, “anticipates that ongoing increases in the target range will be appropriate.”
This implies that the Fed is laying out the criteria under which it might pause rate hikes over the coming months. Now this doesn’t mean that any pause is imminent, given how far ahead the Fed plans, but it is likely looking to tee at least a smaller rate hike if data plays out as anticipated.
What this means is that the Fed will start to factor in the fact that has already hiked rates dramatically in 2022 from essentially zero to almost 4% in November 2022.
Given that these hikes began in March and many believe monetary policy can take around a year before the its impact is felt, the Fed is signaling that there’s a chance it has already done enough to fight inflation at least after a probable December hike is factored in.
The Fed is already clear that its policies are proving restrictive to the U.S. housing market as mortgage costs have shot up in 2022. However, Powell commented that the U.S. housing market has been “very overheated,” so any house price declines may be less of a concern to the Fed currently.
So, yes, the Fed will be watching other economic indicators, too, just as you would expect. Still the fact that rates have risen sharply becomes a factor in the Fed’s decision-making process.
It’s early days. The Fed is starting to soften its language, but without some real changes in the economic data, a meaningful hike in December and perhaps February, too, is quite likely.
On current forecasts, unfortunately upcoming Consumer Price Index inflation data is unlikely to give the Fed what it wants. Nonetheless, as monetary policy becomes more restrictive, maybe the Fed will be less willing to continue to hike rates unless the inflation data displays absolutely no signs of improvement.
Powell has indicated that the Fed’s assessment of the level of interest rates, and how restrictive they are, may be just as important as what the Fed sees in near-term inflation data. That means the Fed may pause rates before inflation data becomes much more rosy.
December Meeting Timing And What To Look For
The Fed has one final scheduled meeting in 2022, with an expected rate decision on Wednesday, December 14 at 2 p.m. ET.
At that meeting, actions may speak louder than words. A rate increase in December seems almost certain. However, the level will be interesting. Currently futures market imply a 0.5 percentage-point hike in rates as the most probable scenario and perhaps the start of a progression to a pause in rates. That would imply the Fed could pause hiking rates at its March 2023 meeting.
However, if the Fed makes a 0.75 percentage point hike in December, a pause may be further away, perhaps coming in June 2023 or even later. That scenario is seen as quite possible, but less likely than a 0.5 percentage point move in December.
Equally if the Fed moved rates up just 0.25 percentage points, a pause could be more imminent in 2023. The markets see that as a far less likely outcome especially while current economic data remains unsupportive. It’s also noteworthy that all committee participants voted for a very large November hike. That’s no signal that a pause is imminent today.
The Fed is starting to talk about arriving at peak interest rates for this cycle. We’re not there quite yet, but peak rates are expected at around 5% in the first half of 2023.