For an investor, a low-interest rate environment is conducive to generating returns in the stock market. However, that seems to be over now and investors need to brace themselves for a higher rate scenario going into 2023. From a near-zero rate regime, the US economy is already experiencing rates of around 3.25%. And, more rate hikes are to come even in 2023.
But, another key development happened this month. Besides calling out an increase in the Federal rate by 75 bps, the ‘economic projections’ were also tabled in September’s Federal Open Market Committee (FOMC) meeting.
The meeting participants submitted their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2022 to 2025 and over the longer run.
Fed Interest Rate in 2023 and Projections
After September’s rate hike by 75 bps, the federal funds rate (FFR) range has moved to 3 and 3.25 percent. As far as interest rate outlook is concerned, the FFR outlook has seen an upward revision amidst the rising inflation.
The FOMC increased the median FFR at the end of 2022 from 3.4% to 4.4%, an increase of 100 basis points (bps).
It represents a rate increase of 125 bps over the next two FOMC meetings this year.
The median FFR for 2023 is revised up to 4.6% from 3.8% in June, indicating there won’t be any rate reduction in 2023.
How Aggressive are Projections
The dot-plot scenario is dynamic in nature and subject to change depending on the information available to meeting participants at the time of the meeting. The projections made in June have already been revised. Going forward, the incoming economic data including US CPI numbers will be closely watched by investors. The impact of rate hikes on recession will remain the make-or-break indicator for the market to take a long-term direction.
“These projections are much more aggressive than what investors had been pricing earlier. The Fed chairman, Powell continued his hawkish stance from the Jackson Hole in the August meeting. Powell reiterated that the central bank’s main goal is to bring the inflation under target range and for that the interest rates need to be in ‘restrictive’ territory for the longer time period,” says Ritika Chhabra- Economist and Quant Analyst, Prabhudas Lilladher.