The Fed projects interest rates higher for longer at least through 2023

The key take away from today's widely expected half-point hike is the Fed's summary of rate hike and GDP projections.

Dot Plot Interest Rate projections from FOMC, highlights and annotations by Mish

Please consider the FOMC Press Release from December 14.

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.  

Hawkish Dot Plot 

The FOMC statement was expected. 

The Dot Plot of interest rate projections from the FOMC Projections Materials was unexpected in light of a seemingly weak CPI report for November. 

FOMC Projections 

2023 Projections, Change From September 2022

• Real GDP 2023: 0.5%, down from 1.2%
• Unemployment Rate: 4.6%, up from 4.4%
• PCE Inflation: 3.1%, up from 2.8%
• PCE Core Inflation: 3.5%, up from 3.1%

The Fed is predicting higher inflation, higher unemployment, lower GDP, and more rate hikes than the September 2022 meeting. 

No Recession?

The Fed never predicts recession. It skirts the issue through this statement: "Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated."

By comparing the fourth quarter to the fourth quarter of the previous year, the Fed can ignore mild recessions in the first three quarters of the year.

At least one member did predict negative GDP for the year if we look at ranges. 

FOMC Range of Projections 

Range Key Points 

• The projected GDP range for 2023 is -0.5 to 1.0 percent, down from -0.3 to 1.9 percent.
• The projected interest rate range for 2023 is 4.9 to 5.6%, up from 3.9 to 4.9 percent in September.

Across the board this is a decidedly weaker economic forecast and a much more hawkish interest rate forecast.

CPI Cools Significantly in November But Rent and Food Still Sharply Increasing

The report is very hawkish in light of what many thought was a taming CPI.

For CPI discussion, please see CPI Cools Significantly in November But Rent and Food Still Sharply Increasing

But also note The Price of Food Jumps Again in November, What's in Your Basket?