FOMC Preview: 50bp Hike, Increase “Terminal Rate”

Expectations are the FOMC will announce a 50bp rate increase in the federal funds rate at the meeting this week and increase the “terminal rate” to 5-5.25%.

From Merrill Lynch:

“A relatively soft November inflation report is unlikely to affect the Fed’s decision. It has clearly telegraphed a 50bp hike in December, which would take the federal funds rate to 4.25-4.5%. The big question is where the Fed goes next. We expect another 50bp rate hike in February and then a 25bp hike in March for a terminal rate of 5.0-5.25%. We think the Fed will need to see material weakening in the labor market to stop hiking.”
emphasis added

From Goldman Sachs:

“Aside from a widely expected 50bp rate hike, the main event at the December FOMC meeting is likely to be an increase in the projected peak for the funds rate in 2023. We expect the median dot to rise 50bp to a new peak of 5-5.25% … We continue to expect three 25bp hikes in 2023 to a peak of 5-5.25%, though the risks are tilted toward 50bp in February.”

Analysts will be looking for comments on the size of future rate hikes. In September, the FOMC participants’ midpoint of the target level for the federal funds rate 4.625% (a range of 4.5-4.75%). Expectations are the FOMC will raise that target range to 5.0-5.25% at the meeting this week.

Note that CPI for November will be released on Tuesday morning (prior to the two-day FOMC meeting). Analysts will be looking at core-CPI ex-Shelter for signs that inflation is falling faster than expected, however the FOMC will likely focus on core-services ex-shelter inflation.

Projections will be released at this meeting. For review, here are the September projections.

Current Wall Street forecasts are for GDP to increase in 2022 Q4 over Q4, slightly above FOMC projections. For example, BofA is tracking: “After rounding, our 4Q US GDP tracking estimate moved up one-tenth to 1.6% q/q saar.” And from Goldman: “We lowered our Q4 GDP tracking estimate by 0.1pp to +1.7% (qoq ar).

These tracking estimates would put Q4/Q4 at 0.63% in 2022. So, the FOMC will probably revise up 2022 GDP slightly, but might revise down 2023 GDP.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP¹
Projection Date	2022	2023	2024
Sept 2022	0.1 to 0.3	0.5 to 1.5	1.4 to 2.0

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.7% in November. So far, the economic slowdown has barely pushed up the unemployment rate, and the FOMC will likely revised down the 2022 projection but might revise 2023 up slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate²
Projection Date	2022	2023	2024
Sept 2022	3.8 to 3.9	4.1 to 4.5	4.0 to 4.6

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of October 2022, PCE inflation was up 6.0% from October 2021. This was below the cycle high of 7.0% YoY in June. There was a surge of inflation in Q4 2021, so with less inflation in Q4 this year, it is possible inflation will decline to the top of the projected year-over-year range in Q4.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation¹
Projection Date	2022	2023	2024
Sept 2022	5.3 to 5.7	2.6 to 3.5	2.1 to 2.6

PCE core inflation was up 5.0% in October year-over-year. This was below the cycle high of 5.4% YoY in February. Core inflation has picked up more than expected and will likely be above the September Q4 projected range.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation¹
Projection Date	2022	2023	2024
Sept 2022	4.4 to 4.6	3.0 to 3.4	2.2 to 2.5