Market indices have taken a slide since the Fed released its 50 bps Fed funds rate hike to 4.25-4.50%, for the first time in 15 years over 4%. This was completely expected, but what perhaps wasn’t baked into the cake was a notably higher outlook on interest rates for 2023 and beyond: 17 Fed officials now see ’23 rate projections at 5.00-5.25%, 7 of which have it higher than 5.25%. That’s another 75 bps higher from where we are right now — a year from now.
It’s the latest of “cold water” moments that are probably now anticipated to a certain level: markets light a bullish match on a glimpse of the best-case-scenario ahead (in this case, something along the lines of: “pause and pivot by mid-’23”). For 2024, the Fed now averages out to rates of 4.00-4.25% — 25 bps lower than where we got to today, in two years. Then, 2025 moves to 3.00-3.25% — the same as where we were on the first day of autumn.
The bad news and the good news is the same, in a way: “higher for longer” is both real and it has a face. This latest dot-plot from the Fed, the most recent of which was from September, more near-term sees stronger U.S. growth: +0.5% GDP for full-year 2022, more than double the +0.2% previously guided. For 2023, guidance has gone lower: from +1.2% in the latest projection to +0.5% today.
“…For longer” — it may not even be a real recession; it may feel similarly uncomfortable to where we are today, but for another year or two, rather than another quarter or two. If you look at Fed statements since their stance became truly hawkish (the June ’22 meeting, which doubled rates 75 bps, to 1.50% — the first such 75 bps hike), they are consistent: Fed Chair Jay Powell has always indicated the Fed is about the long game, they never expected taming inflation would be easy (they still target +2% inflation, btw) and knew this policy would inflict some “pain.”
Powell respects the strength of the labor market, and he does not expect big layoffs going forward. It is out of balance, however, with Labor Force Participation still underperforming. Powell again mentioned the 4 million jobs going wanting in our current domestic workforce. He keeps an eye on productivity picking up in the future. Strength for the wage-earner is not necessarily anathema for bringing inflation down, but productivity would have to make up the difference.
Finally, rate cuts are not projected to begin, according to Powell, until inflation metrics continue moving toward +2% “in a sustained way.” Well when the heck might that be? “We have a ways to go,” says Powell. Major market indices closed lower on the day, giving back some — not all — of yesterday’s gains: the Dow -142 points, -0.42%, the S&P 500 -0.61%, the Nasdaq -0.76% and the small-cap Russell 2000 -0.65%.
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Fed Hike & Dot-Plot: "Higher for Longer" Now Has a Face
Market indices have taken a slide since the Fed released its 50 bps Fed funds rate hike to 4.25-4.50%, for the first time in 15 years over 4%. This was completely expected, but what perhaps wasn’t baked into the cake was a notably higher outlook on interest rates for 2023 and beyond: 17 Fed officials now see ’23 rate projections at 5.00-5.25%, 7 of which have it higher than 5.25%. That’s another 75 bps higher from where we are right now — a year from now.
It’s the latest of “cold water” moments that are probably now anticipated to a certain level: markets light a bullish match on a glimpse of the best-case-scenario ahead (in this case, something along the lines of: “pause and pivot by mid-’23”). For 2024, the Fed now averages out to rates of 4.00-4.25% — 25 bps lower than where we got to today, in two years. Then, 2025 moves to 3.00-3.25% — the same as where we were on the first day of autumn.
The bad news and the good news is the same, in a way: “higher for longer” is both real and it has a face. This latest dot-plot from the Fed, the most recent of which was from September, more near-term sees stronger U.S. growth: +0.5% GDP for full-year 2022, more than double the +0.2% previously guided. For 2023, guidance has gone lower: from +1.2% in the latest projection to +0.5% today.
“…For longer” — it may not even be a real recession; it may feel similarly uncomfortable to where we are today, but for another year or two, rather than another quarter or two. If you look at Fed statements since their stance became truly hawkish (the June ’22 meeting, which doubled rates 75 bps, to 1.50% — the first such 75 bps hike), they are consistent: Fed Chair Jay Powell has always indicated the Fed is about the long game, they never expected taming inflation would be easy (they still target +2% inflation, btw) and knew this policy would inflict some “pain.”
Powell respects the strength of the labor market, and he does not expect big layoffs going forward. It is out of balance, however, with Labor Force Participation still underperforming. Powell again mentioned the 4 million jobs going wanting in our current domestic workforce. He keeps an eye on productivity picking up in the future. Strength for the wage-earner is not necessarily anathema for bringing inflation down, but productivity would have to make up the difference.
Finally, rate cuts are not projected to begin, according to Powell, until inflation metrics continue moving toward +2% “in a sustained way.” Well when the heck might that be? “We have a ways to go,” says Powell. Major market indices closed lower on the day, giving back some — not all — of yesterday’s gains: the Dow -142 points, -0.42%, the S&P 500 -0.61%, the Nasdaq -0.76% and the small-cap Russell 2000 -0.65%.
Questions or comments about this article and/or its author? Click here>>