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Sunday, January 29, 2023

FOMC Preview: 25bp Hike

by Calculated Risk on 1/29/2023 08:11:00 AM

Expectations are the FOMC will announce a 25bp rate increase in the federal funds rate and analysts will be looking for any mention of a possible pause in rate hikes at the March FOMC meeting.

From Merrill Lynch:
"At the February FOMC meeting, we look for the Fed to raise the target range for the federal funds rate by 25bp to 4.50-4.75%. ... incoming data that points to a broadening of the slowdown and further signs of decelerating price pressures appear to have tipped the balance within the FOMC toward another downshift in the pace of rate hikes next week."
We expect Chair Powell to continue to emphasize that a slower pace of rate hikes does not signal the Fed’s job is over. ... the decision may be for a smaller 25bp hike, but the Fed will want to avoid the interpretation that this implies a lower terminal rate or an earlier onset of rate cuts than the committee viewed as appropriate when it last met in December. That means no change in policy rate guidance in the FOMC statement. We think the statement will continue to say that “ongoing increases in the target range [for the federal funds rate] will be appropriate.” A softening in this language could lead to an undesired easing in financial conditions."
emphasis added
No projections will be released at this meeting. For review, here are the December projections.  Since the last meeting, the economy has performed better than the FOMC expected, and inflation was lower than expected.

The BEA reported real GDP increased at a 2.9% annual rate in Q4 and was up 1.0% on a Q4-over-Q4 basis.  This was above the December projections for 2022.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date2022202320242025
Dec 20220.4 to 0.50.4 to 1.01.3 to 2.01.6 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 3.5% in December. This put the Q4 rate at 3.6%, slightly lower than the FOMC projection.  

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date2022202320242025
Dec 20223.74.4 to 4.74.3 to 4.84.0 to 4.7
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of December 2022, PCE inflation was up 5.0% from December 2021. On a Q4-over-Q4 basis PCE inflation was up 5.5% in Q4 2022.   This was below the FOMC projection.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date2022202320242025
Dec 20225.6 to 5.82.9 to 3.52.3 to 2.72.0 to 2.2

PCE core inflation was up 4.4% in December year-over-year. On a Q4-over-Q4 basis core PCE inflation was up 4.7% in Q4 2022.   This was at the bottom of the FOMC projection range.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date2022202320242025
Dec 20224.7 to 4.83.2 to 3.72.3 to 2.72.0 to 2.2