UBS
The Fed's December statement opens with the observation (as it was in November) that job gains have been "robust" and that the unemployment rate remains low. Note, it is important that the Fed get that in right at the top and have not downgraded from November's statement. It also repeats the November line that inflation remains "elevated". The statement reports 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."
Powell comments that higher interest rates are weighing on business investment. Note, that's quite possibly the most important thing he'll say today. Looking back over 25 years worth of Fed statements, there's a very strong correlation between the Fed changing its view on business investment and then soon after changing its bias in guidance. Business investment is a convenient proxy for the entire economy. When investment slows, businesses are no longer backing themselves.
TD Securities
The Fed met street expectations for a 50-basis point hike, while updating its view for the peak level of the policy rate in 2023. Given the current pace of hikes, the Fed likely sees the policy rate at 5.1% (5.25% upper bound) by early 2023, before it pauses to observe the impact of past rate hikes on the economy.
Though we have the Fed ending its hiking cycle at 5% at its next meeting, we think the effect of such a monumental rate hiking cycle will take its toll on the economy. We too have GDP decelerating significantly in 2023 as the lagged effects of policy slows consumer spending. Given that inflation has already started moving in the right direction, this economic weakness should help drive price growth even quicker towards the Fed's 2% target.
CIBC
Assuming that supply chain issues continue to fade, feeding through to a moderation in goods prices, and commodity prices continue to feel the weight of slower global growth, core inflation could come close to the 2% target in late 2023 in our view, with the effects of past rate hikes materializing more strongly on core services inflation by then. The core services segments of inflation are driven by tightness in the labor market, and the imbalance between labor supply and demand is the area of the economy that policymakers are looking to cool in order to get inflation back to 2% on a sustainable basis, as policymakers are aware of the mechanical lag with which a slowdown in rent will feed through into price indices.
We continue to expect one final 50bps interest rate hike from the Fed to reach our forecast of terminal (5.0% on the ceiling of the fed funds rate), with labor market strength being the best indicator for whether or not that will be enough tightening. The upgrade to the inflation projection leaves room for continued downside surprises to limit rate hikes relative to what was shown in the FOMC projections today.
Westpac
We are in line with the FOMC for 2022 GDP growth (0.5%yr from the FOMC and 0.7%yr for Westpac), our expectation for 2023 is materially lower (-0.2%yr compared to the FOMC’s 0.5%yr). In our view, only if the FOMC cut aggressively through 2024 can growth rebound back above potential and begin to recover some of the output gap created by tight policy through 2022 and 2023.
As long as annual inflation continues to decelerate rapidly towards target, and wages growth slows, the FOMC will arguably be happy to let the 10-year yield move modestly lower through 2023 as this will result in real term interest rates remaining materially-above zero. With a 10-year yield forecast of 3.10% for December 2023, this is essentially our baseline view.
Wells Fargo
If the FOMC takes the federal funds rate to a range of 5.00%-5.25% and leaves it there through year-end 2023 as the median dot signals, that implies another 75 bps of rate hikes are still yet to come. Our forecast looks for one more 50 bps rate hike on February 1 followed by a final move of 25 bps in mid-March.
Perhaps the fed funds rate will peak a bit higher than we and the dots currently suggest, or perhaps the path to the peak will look somewhat different. That said, it appears increasingly likely that we are closer to the end of this hiking cycle than we are to the beginning. An outright pivot to monetary policy easing remains farther off and will depend on how quickly inflation moves back toward 2% and how much economic pain is induced during the process. The Fed's soft projections for GDP growth and expectations for higher unemployment next year suggest it will be a bumpy ride. Buckle up
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