15.12.2022 Rates Might Stay Higher For Longer Time

Stock traders get an as-expected rate hike of 50-basis points by the Federal Reserve, but there’s a little more fear that rates might stay higher for much longer than some of the bulls were anticipating.

Fed

While the recent Fed rate hike was a step down from the previous four hikes of 75-basis points each, most Wall Street insiders feel the Fed’s policy statement, economic projections, and Fed Chair Powell’s comments were still quite hawkish.

The Fed’s “dot plot” shows most officials expect the central bank’s benchmark rate will rise above +5% next year with the median forecast being around +5.10%. That would imply a target rate (where the Fed’s rate hikes will end) of 5.0% to 5.25%. 

Officials also lifted their median forecast for interest rates in 2024 to an implied rate of 4.00-4.25%, while the forecast for 2025 was unchanged at 3.00-3.25%. These projections fit with the Fed’s rhetoric of a “higher for longer” rate hiking cycle, though they conflict with a belief held by many bulls that the Fed will actually have to start cutting rates next year because things might start to get too bad.

Even with the aggressive approach, Fed officials expect inflation will still be above +3% by the end of 2023. At his follow up press conference, Powell noted that rate cuts will not begin until inflation metrics continue moving closer toward +2% “in a sustained way.” And while Powell did acknowledge that the US economy has cooled, he also highlighted the ongoing strength of the US labor market with +4 million unfilled jobs that continue to put upward pressure on wages.

Economy 

The Fed’s updated economic projections forecast unemployment climbing to 4.6% next year, versus the current 3.7% rate. At the same time, economic growth in 2023 got a downgrade to +0.5% from a previous +1.2% forecast in September. That means the year ahead is expected to experience a combination of rising unemployment, slowing economic growth, and high inflation, which bears point out is the recipe for dreaded “stagflation.” Bulls still believe that expanding disinflationary forces will speed the end of the Fed’s rate hike cycle in 2023, which is helping to somewhat calm fears of a Fed-induced recession in 2023.

However, bears counter that China’s reopening could interrupt those forces and send inflation climbing again. Additionally, bears believe worries about where stock market growth is going to come from next year will start weighing more heavily on investor sentiment as we get past the holidays and analysts start adjusting their earnings forecasts for Q4 and the first part of 2023.

For what it’s worth, most Wall Street insiders seem to think a rough first half of 2023 will be followed by smoother sailing in the last half.

Economic data today includes Retail Sales, Industrial Production, Business Inventories, the Philadelphia Fed Manufacturing Index, and Empire State Manufacturing. The earnings highlights will be Adobe and Nintendo.

Rates Might Stay Higher For Longer Time

Wishing you a great week!