Short-term interest rates will be announced at the first Federal Reserve (Fed) meeting of 2023 on February 1: 2023. Currently both interest rate futures and the Fed’s recent hawkish tone mean we can expect another interest-rate hike, but it may be small in comparison to 2022 decisions.
The interest-rate move is currently expected to be smaller than past hikes at 0.25 percentage-points. There is still significant economic data to come in ahead of the Fed’s decision and this could change the Fed’s view. The decision is scheduled for February 1 at 2pm ET, and will be accompanied by a press conference from Fed Chair Powell, but without an update to the Fed’s economic projections, that will occur at the following March meeting.
Expected Interest Rate Moves In 2023
On December 14, the Fed’s summary of economic projections indicated that policy-makers see rates for 2023 between 4.75% and 5.75%. With rates at 4.5%-4.75% today, the implication is that there is at least one more rate increase to come in 2023, and quite possibly several. The central path according to the CME’s FedWatch tool, is that the Fed increases rates 0.25 percentage-points at both its February 1 and March 22 meetings and perhaps holds rates steady after that.
However, there’s a chance, albeit less likely, that the Fed is move dovish, holding rates steady after a February 2023 hike, or in a more hawkish move, continues upping rates for the first half of 2023 if inflation doesn’t trend favorably. The consensus though, is that the Fed is now close to the maximum level it wants to see for interest rates, and the debate surrounds exactly where peak interest rates are, and how long rates will remain at that level. Currently the expectation is that the Fed funds rate exceeds 5% for most of 2023.
The Fed has outlined in some detail what it is looking for to be confident inflation is trending back to target. The Fed’s wish list includes some cooling off of wage growth and resulting lower inflation for services. That’s combined with an expectation that good prices and housing costs are subdued in 2023.
Incoming Economic Data
Ahead of the February decision, the Fed will closely watch inflation reports. CPI inflation for December will be reported on January 12. The Fed’s preferred PCE inflation measure will be reported for November on December 23 and for December on January 27.
Inflation nowcasts from the Cleveland Fed imply relatively subdued inflation numbers overall, but this may be driving by falling energy costs whereas the Fed’s preferred core inflation metrics could come in higher once food and energy prices are removed.
Within these reports, the Fed will be closely watching services inflation for signs that it is easing. The Fed will also be tracking wage growth, in the hope that it is trending lower, implying easing services inflation.
Of course, the Fed will also monitor a host of other economic news as a gauge of potential recession risk for the U.S. economy. Specifically the Fed would prefer the job market to cool somewhat, but not so much that the U.S. sees a recession. There will be an employment report on January 6 that may inform the Fed’s thinking on this.
The Fed has signaled that we are close to a peak level for federal funds. Early 2023 should indicate where that level is and give clues to how long rates will remain there. February is likely to bring another small interest rate increase, and another is expected after that. Still, the exact path will depend on how inflation trends compared to risks of a U.S. recession.