For some Federal Open Market Committee (FOMC) meetings, the result seems obvious ahead of time to just about everyone. This was one of them. When the result is obvious, the market shouldn’t react much because there’s little room for a surprise to push prices around. But this time, the market did react. Why? It’s simple: The FOMC is splintering into factions, and that makes the outcomes from future meetings much less obvious.
The FOMC hiked rates by 50 basis points (bps; 100 bps equal 1.00%). That’s down from the 75 bps-per-meeting pace the FOMC had been on. After this latest hike, the midpoint for the federal funds rate target is 4.375%. Federal Reserve (Fed) officials have been talking about slowing down the pace of hikes for weeks, so this shift was not very surprising. Eventually, the federal funds rate will reach a peak. That’s where the meeting’s outcome is more interesting.
There are 12 Fed banks and 7 members of the Fed Board of Governors. That adds up to a total of 19 participants. However, only 12 of those participants get to vote on changes to monetary policy. All of the Fed Board members and the president of the Fed Bank of New York get to vote at every meeting. But the other bank presidents have an annual rotation, so only four of them get to vote.
In the Summary of Economic Projections, Fed officials provide their educated guesses about where growth, unemployment, inflation, and the federal funds rate will be over the next few years. The table below shows meeting participants’ views on how the federal funds target rate should change by the end of next year. Columns 2 and 3 show the number of meeting participants who believed, as of September or December, that the indicated rate target in Column 1 is where the federal funds rate will be when we reach the end of 2023. At September’s meeting, one participant thought the federal funds rate should be at 3.875% by the end of 2023. That most dovish person thinks 25 bps more should be sufficient. Also in September, six participants thought the 2023 year-end federal funds rate target would be 4.875%. They have joined the majority of participants indicating that 75 bps more in hikes might be appropriate.
As we approach 2023, the voting membership will change, and some of the more “hawkish” members could get a louder voice. Those are the ones who are looking for an additional 100 bps to 125 bps of hikes. However, the participants’ overall core view has shifted somewhat higher, but not massively.
We believe the path of policy will follow the path of inflation. The media like to focus on the year-over-year inflation number. It’s high, but it’s also misleading in terms of where inflation is going. Instead, inflation’s month-over-month number or its three-month moving average are more informative about the path inflation is likely to take. These data points are much more encouraging for inflation and, therefore, for the path of Fed policy.
A key message from Fed officials is that while they want to get to their 2% inflation target, they don’t have to get there now. Their projections are supposed to be their optimal response to the data, and their latest projection shows that inflation doesn’t have to come down to 2% over three months. They are thinking it will take three years.
The Fed hasn’t been an investor’s friend during 2022, but for 2023 it might be less of an enemy.
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