The Federal Reserve’s December meeting minutes released on Wednesday shows that officials are committed to fighting inflation and expect higher interest rates to remain in place until more progress is made. The stock market also got clarity that there will not be any rate cut in 2023 and any fed rate cut can be expected only in 2024.
The last rate hike of 50 bps in December 2022 ended a string of four consecutive three-quarter point increases, raising the benchmark fed funds rate target range to 4.25%-4.5%, the highest level in 15 years.
The stock market is, perhaps, pricing in the possibility of another 0.5-0.75 percentage point rate increase in 2023-24 before pausing to assess the impact of the hikes on the economy. In the next Fed meeting on January 31-February 1, markets expect Fed to hike rates by 0.25%.
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Meanwhile, as per the Minutes, it was seen that equity markets moved higher around October 2022. However, according to Fed officials, equity market contacts noted risks to growth ahead, and earnings expectations for coming quarters had been marked down.
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Regarding the outlook for monetary policy, both market- and Desk survey-based measures indicated expectations for the Committee to maintain elevated policy rates through 2023. This means the markets are well aware of the growing risks and the likelihood of a recession in the US. The latest Federal Reserve meeting minutes suggest that the U.S. economy is headed for recession as the central bank will remain aggressive in raising rates to cool inflation, warns Nigel Green, CEO, deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organizations.
A tight labour market remains the Fed’s biggest concern, ““It appears that officials remain hawkish and are especially concerned about the tight labor market. With the labor market not cooling as fast, there seems to be a considerable turnaround in tone from the more dovish minutes in November,” says Green.
“The job openings held nearly steady at historically high levels in November, adding to evidence that the labor market remained strong heading into 2023 despite rising interest rates and concerns about an economic slowdown. About 10.5 million jobs were available in November, essentially unchanged from October and well above pre-pandemic openings levels,” says Mitul Shah, Head of Research at Reliance Securities.
Fed Pivot, the moment when the central bank decides to either pause or start cutting rates, may still be a few months away for the markets to decide the next course of direction. Nigel Green concludes: “The tone of the minutes indicate the Fed is not yet ready to pivot as the central bank believes risks for inflation remain to the upside and they will keep tightening until more substantial progress is made on bringing it back closer to target.” Fed members have agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The November inflation numbers were at 7.1% while the December CPI data gets released on January 12, 2023, at 8:30 A.M. Eastern Time.