22. September 2023

Fed Interest Rate Hike: What to Expect in 2023

• The Federal Reserve is expected to raise interest rates at its upcoming meeting on February 1.
• Financial conditions are expected to remain sufficiently restrictive to prevent inflation from rising too quickly.
• Markets are pricing in the transitory nature of any looming inflationary scare, expecting it to abate in 2023 and beyond.

Expectation for FOMC Meeting

The next FOMC meeting is on February 1, where the Federal Reserve will determine their next policy decision regarding interest rates. The current expectation is an interest rate hike of +0.25%, with the market assigning a near 100% certainty of this outcome, setting the policy rate to 4.5%-4.75%.

Fed’s Expected Course for 2023

The Fed’s expected course for 2023 is to keep rates elevated, with several Fed Governors recently stressing the need to keep policy rates sufficiently restrictive in order to make sure inflation does not stage a comeback after initial signs of slowing, like it did in the 1970s. In Jerome Powell’s December 14 press conference, he said that financial conditions have tightened significantly over the past year and that overall financial conditions must continue to reflect policy restraint in order for inflation levels to be brought down to 2%.

Pricing In The Transitory Inflation

Global risk assets have been rallying as market participants increasingly expect any looming inflationary scare to abate in 2023 and beyond. This would be bullish for risk-assets given that it would lead to the return of lower interest rates but investors should bear in mind that such expectations may be frivolous and short-lived.

Second-Order Effects

Any changes made by the Fed may have second-order effects which could impact other markets or sectors within them such as commodities, equities or bonds markets. It remains important then for investors or traders interested in these areas pay close attention when making decisions based on potential changes within these markets due to FOMC meetings or other events related thereto.

The FOMC meeting on February 1st will be closely watched by investors as they assess how likely it is that interest rates will rise and what impacts this may have on various markets both directly and indirectly. Investors should also pay attention accordingly when making decisions about their investments as changes made by the Fed can have far reaching implications across many different asset classes both domestically and internationally.