CHICAGO, ILLINOIS – JUNE 04: Jerome Powell, Chair, Board of Governors of the Federal Reserve speaks … [+]
Many Federal Reserve policy makers believe another 2023 interest rate hike may be warranted. This information came in September’s Summary of Economic Projections where twelve policy makers forecast that rates would be at 5.5% to 5.75% by the end of 2023. This represents one more interest rate hike from current levels.
That said, it’s not a foregone conclusion, seven policy makers see rates remaining at their current level for the remainder of 2023. As it stands, there is majority support for another rate hike in 2023, either on November 1 or December 13. Still, it does not look like it will be a consensus decision.
Incoming Data
Of course, incoming data will matter. Fed Chair Powell emphasized at his September 20 press conference that the Fed will “proceed carefully” while looking at “the totality of all the data” as the “risks become more two-sided”.
A further 2023 rate increase hangs in the balance. Cooling inflation and a softer jobs market will make another 2023 rate increase less likely. Powell noted that the past three months of inflation data had been encouraging. In contrast, if inflation rebounds and the job market remains strong, then another interest rate hike becomes more likely. Other data from home prices to economic growth will matter too, but inflation and jobs data are likely to be decisive.
Top of the Cycle
Still, regardless of whether another interest rate increase does occur. It seems that we are close to the top of this interest rate cycle. Almost all policy makers see lower rates in 2024. The implicit forecast of the fixed income market sees lower rates too, albeit with rates remaining relatively high next year.
Further Risks
There are other risks to the economy. There’s a chance of a government shutdown in 2023, which in addition to its economic impact could cause disruption to some of the economic data that the Fed relies on. The ongoing automotive strike could weigh on the economy and energy prices are currently picking up again. These issues, and many others, could alter the economic picture and hence the Fed’s position on rates.
Overall, the Fed believes we are close to the top of this interest rate cycle. But, there’s currently a good chance that interest rates move another notch higher in 2023.
