At its past three meetings, the Fed has consistently raised rates by 0.75 percentage points. With the Fed’s September decision made, there are now two monetary policy decisions left in 2022. These rate decisions are scheduled for November 2 and December 14. The Fed is free to set rates whenever it chooses, but typically sticks to the meeting schedule, unless the economic news is extreme.
It’s unlikely either meeting will be much of a surprise to markets with a rate increase expected at both, likely ending the year around the middle of the 4% to 5% range for short-term rates. Still, comments about potential directions for 2023 will be closely watched, especially with an update to the Fed’s economic projections and a press conference accompanying December’s scheduled rate decision.
From the October Fed Meeting
First off, there is no meeting scheduled for October, although the minutes from the September meeting will be released here on October 14. Those minutes may offer more color on the Fed’s thinking. The Fed typically holds eight monetary-policy decision meetings a year, so there are four months where the Fed does not meet. October is one of them.
November 2 Fed Meeting
The Fed will set rates on November 2. Fixed income markets imply a 0.5 to 0.75 percentage point hike at that meeting. That will be informed by a host of economic data from October. Most importantly, we’ll have a range of recent data points on inflation such as CPI, PPI and PCE inflation numbers leading into that meeting.
Inflation data matters. This is because although the Fed has a host of metrics to monitor, inflation is currently by far the main concern for the Fed. The November meeting won’t see an update to economic projections or a press conference, as that only occurs every other meeting. Expect less color from the Fed at this meeting and more detail in December.
Interpreting Upcoming Inflation Data
With upcoming inflation numbers ahead of the November decision, lower is better. However, the Fed will tend to look past swings in energy costs driving the headline numbers to determine underlying trends in prices for goods and services such as housing, food, transportation and medical care.
The Fed has been clear that these price trends, especially from the August CPI data released in September, still imply US inflation well above the Fed’s 2% goal. Today we have annual topline CPI inflation broadly at 8% and around 6% once you strip out more volatile prices or use other statistical techniques to get to underlying inflation rates. In contrast, PPI inflation is closer to 9% today, and PCE inflation is at 6% given differences in what is being measured. Still all of these are far above the Fed’s 2% goal.
The potentially good news is that the final quarter of 2021 did see some very high US inflation numbers. If these figures drop out of the inflation 12-month series in late 2022 and early 2023, and are replaced by lower month-on-month totals, the overall annual inflation number may also fall fairly sharply. That may provide a bit of air cover for the Fed to ease off on rate hikes in 2023.
However, despite the worrying headlines, fixed income markets may be cautiously optimistic about inflation. There is an implied expectation from both fixed income markets and inflation expectation surveys that the inflation numbers will become more reassuring over the coming months.
The Fed obviously hasn’t seen that data yet, and remains cautious because it doesn’t want to take unnecessary risks on inflation running ahead of target for longer than necessary. Of course, the other side of the coin is that markets could be wrong here and if they are, there could be more pain for investors as 2022 draws to a close.
December 14 Fed Meeting
Markets currently anticipate a 0.25 to 0.5 percentage point move up on December 14. This works out to rates ending the year in a range of 4% to 4.5%. This is something both the financial markets and Fed policymakers’ forecasts appear to agree on at the time of writing, although the markets and at least one Fed policymaker do see a small chance that rates could move a little higher.
December is far enough away that the Fed might change the plan a little here, just as September expectations nudged up from 0.5 to a 0.75 percentage point hike as the meeting approached. There’s some chance the Fed delivers a larger hike than anticipated if the inflation data in the run-up to the meeting doesn’t have any encouraging signals that price rises are starting to ease. If that were the case, the Fed officials would likely make further speeches, signaling major concern about inflation in the run-up to the December meeting along the lines of Federal Reserve Chair Jerome Powell’s August 2022 Jackson Hole speech.
If we see a really encouraging run of inflation numbers, the Fed may also deliver a smaller hike than expected, perhaps just 0.25 percentage points, although the market currently views this as less likely. As such, the question really is the size of the hike for the December meeting. It’s unlikely the Fed, based on its current communications, would get to the point where it wants to hold rates steady or drop them.
In December the Fed will update its Summary of Economic Projections and hold a press conference, too, which may provide more clues on how policy may evolve in 2023 and how the Fed sees chances of a US recession.
Currently the Fed’s projections are showing an increase in unemployment that suggests a strong chance of recession in 2023 and a few policymakers are forecasting a 2023 recession more directly in their economic growth projections. There’s also some possibility the US is in recession currently, given stagnant economic growth so far in 2022. We’ll see the first estimate of US Q3 GDP growth on Thursday, October 27.
The Fed may not change the script much as 2022 draws to a close. Central bankers aim to avoid surprises, and the Fed spends a lot of time steering the markets through its comments and speeches to keep things steady and predictable.
However, inflation data will be very closely watched and determine the Fed’s playbook into 2023. In the final meetings of 2022, unless there are dramatic surprises, the thing to monitor will be hints from Powell and others as to how things may play out in 2023 .
The other side of the coin is recession risk. For now, the Fed cares more about fighting inflation as the US economy, and especially the employment situation, is reasonably strong. If that changes, the Fed will have more of a balancing act.
Finally, bear in mind that the market has likely largely factored in further expected rate hikes in 2022 at this point. What would more likely move markets are potential adjustments to the Fed’s plans, or further detail on 2023 where the market is less certain on how monetary policy will play out.