In 2022, the Fed resorted to the most aggressive rate hikes in decades. As we enter 2023, many economists believe that the US central bank would pivot to rate cuts.
Fed started hiking its rate hikes in 2022 with the first hike since 2018. It started with a 25-basis point rate hike at the March meeting and then raised rates by 50 basis points at the May meeting. After that, it raised rates by 75 basis points in the next four consecutive meetings.
However, in December, the Fed slowed down on the pace of its hikes and raised rates by 50 basis points. After the December meeting, the FOMC upwardly revised the dot plot which shows that the median projections of Fed fund rates at the end of 2023 are 5-5.25%.
Currently, the Fed fund rate is 4.25-4.50%. Two FOMC members see rates at 5.5-5.75% by the end of 2023. However, two FOMC members also predict rates between 4.75-5% by then.
Here it is worth noting that the FOMC projections are subject to change. At the December meeting, the members raised their projection of terminal rates by 50 basis points.
Notably, Fed chair Jerome Powell has somewhat toned down his hawkish stance but has still not shown any inclination toward a pivot to rate cuts.
Economists Believe the Fed Would Pivot to Rate Cuts
Many economists believe that the Fed would need to pivot to rate cuts in 2023. Wharton professor Jeremy Siegel believes that the Fed would start cutting rates in 2023 and predicts that US stocks would rise 15% next year. There is a guide on how to buy stocks through PayPal.
Tom Lee of Fundstrat also believes that the Fed would not raise rates in 2023. JPMorgan also believes that a possible Fed pivot in the back half of 2023 could trigger a rally in US stocks.
Meanwhile, Powell has said that the US central bank would continue to monitor data points and accordingly adjust its monetary policy.
US inflation fell to 7.1% in November which is 2 percentage points lower than the June high. Most economists believe that US inflation would come down in 2023 partially because of the high base year effect. High inflation took a toll on US stocks in 2022 but some investments can do well in periods of high inflation.
Recession Risks Rise Amid Rising Rates
Recession fears have risen amid rising interest rates. Greg Jensen who is the co–chief investment officer of Bridgewater Associates is among those who have joined the recession bandwagon. Notably, while some still believe that a recession, if at all it happens would be quite shallow, Jensen believes it would be the other way around.
Fed’s rate hikes, recession fears, and the fallout of FTX bankruptcy have also taken a toll on digital assets. We have a guide on whether crypto is recession-proof.
Meanwhile, slowdown fears are not limited to the US only. While China has relaxed its stringent COVID-19 restrictions amid widespread protests, the Chinese economy continues to sag as is evident in most data points.
While China is still officially targeting a GDP growth of 5.5% for 2022, it looks unlikely to reach anywhere near that level considering the growth in the first nine months of 2022. Supply chain disruptions in China could also fuel recession in the developed world.
As for recession fears, Michael Burry, Jamie Dimon, Jeff Bezos, Paul Tudor Jones, David Rosenberg, and Leon Cooperman are among those who have warned of a recession. Several indicators including the yield curve inversion have been flashing red signals for a possible US recession next year.
Fed Might Cut Rates in US Economy Slumps into Recession
Most analysts believe that a slowing US economy would lead to a Fed pivot. At his press conference following the December FOMC meeting, Powell said that a soft landing for the US economy was still possible if inflation comes down.
He added, “I just don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not … it’s not knowable.”
Overall, the Fed would be as important for markets next year as it was in 2022. While markets still believe that the Fed would pivot to rate cuts in 2023, Powell has been quite clear in its communication that the US central bank is not stepping back unless inflation falls meaningfully.
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