Today’s announcement of a 50 bp rate increase topped off a year of rate moves unseen in recent history. The Fed increased rates 7 times this year including 4 consecutive 75 bp increases. The increase to 4.25% – 4.50% puts it at the highest level since December 2007, when Fed Chair Bernanke cut rates during the financial crisis.
What’s next? Today’s dot plot of predictions from Fed officials shows a “terminal rate” of 5.1% (up from September’s estimate of 4.6%). So, that’s “how high?…what about “how long?” – the dot plot indicates no rate cuts for all of 2023, with 1.0% in cuts during 2024. Note that would put the rate in December 2024 right back to today’s rate. Futures market assumptions are more optimistic. They indicate a likely 25 bp increase in February and March 2023 with the longed for “Fed pivot” starting in the summer. It seems that the end of the tightening is within sight. However, the Fed will keep up the hawkish rhetoric until “the job is done” in Powell’s words. He keeps reiterating that “the historical record cautions strongly against prematurely loosening policy”; referencing Fed Chair Volker’s premature rate cuts in the early 1980s, only to have to hike rates again even higher than before. The 10 year Treasury is right at 3.50% with 30 Day Term SOFR at 4.32%. Regarding yesterday’s cooler than expected CPI report, it is significant to note that services costs remain high with job openings exceeding available workers. That issue still isn’t “solved.” Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners
