FOMC preview: Policy rate to increase by 50 basis points
REAL ECONOMY BLOG | December 12, 2022
Authored by RSM US LLP
Two weeks after Federal Reserve Chairman Jerome Powell pointed to slower interest rate increases, the central bank is poised to do just that when the Federal Open Market Committee meets this week and raises its policy rate by 50 basis points.
Such an increase would follow a series of 75 basis-point increases and lift the Fed’s policy rate to a range between 4.25% and 4.5%.
When considered along with the summary of economic projections and Powell’s news conference on Wednesday, the smaller rate hike will be part of what we expect to be a lift-and-hold policy framework over the next year.
An interesting aspect of the FOMC meeting will be found inside its summary of economic projections and dot-plot forecast of interest rates. There is the possibility that the central bank will set the median dot-plot forecast to 5.125% for next year, in contrast with the consensus forecast of 4.875%.
While we are holding to our forecast of a peak between 5% and 5.25%, it would not be any surprise if the major takeaway following the release of November inflation data on Tuesday and the Fed forecast on Wednesday is a risk of a peak above 5.5% despite the softer economic outlook.
In addition, we expect the median forecast of growth for next year to sink below 1%, which would imply risks around a recession and be in line with our core view of a 65% probability of a recession.
Moreover, we expect the median forecast of the unemployment rate to move closer to 4.5%, up from the current 3.7%, and inflation projections to remain like those published in September, mostly because of the weaker growth outlook.
We expect little to no change in the Fed’s policy statement from November. But it seems that the FOMC will need to address the phrase “ongoing increases” as the Fed slows the pace of its hikes.
One would think that the committee would want to balance that view with somewhat hawkish language around price stability to temper market expectations of policy easing next year.
And these market expectations will almost certainly be one of the primary topics at Powell’s news conference on Wednesday. While we do not think that Powell will stray too far from his recent speech on the labor market and inflation, the questions and answers that follow the likely downgrade of the forecast and risk of a higher rate peak will demand careful explanation.
Call us at (800) 627-0636 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Joseph Brusuelas and originally appeared on 2022-12-12.
2022 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Lewis, Hooper & Dick, LLC is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Lewis, Hooper & Dick, LLC can assist you, please call 1-800-627-0636.