The Federal Reserve Open Market Committee raised the Fed funds rate today by 0.50%, to a range of 4.25-4.50%. The vote was unanimous, and marks a downshift from a pace of four straight 0.75% hikes. The formal statement language was barely changed from the prior month, offering no new information.
According to the CME Fed funds futures market1, expectations were high (~80%) for a half-percent change, with chances of a larger hike having steadily fallen since the early November meeting. Based on current quarterly probabilities for 2023, the key rate is expected to rise 0.50% by March to 4.75-5.00%, with little change through June, but then drifting lower to a wider range of 4.50-5.00% by September, which implies either a continued pause or even a slight rate cut. The December assumed level has fallen to 4.25-4.50%, which implies further cuts. Probabilities have changed slightly in recent weeks, with a longer expected pause and drop in the terminal rate, with marked calls for easing later in keeping with higher chances of recession over that stretch. All-in-all, futures markets put the terminal rate right around 5.00%, with estimates from private economists running plus or minus a quarter-percent around that level. There remains a decent degree of uncertainty about this; again, with the key variable being how long it takes for inflation to ease enough to satisfy the Fed.
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