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15 Dec 2022

Econ Digest

The FOMC meeting on December 13-14, 2022: The Fed slows rate hike to 0.50% as expected


        The Federal Reserve (Fed) raised its policy rates by a slower pace of 0.50% as expected at the Federal Open Market Committee (FOMC) meeting on December 13-14, 2022, bringing the Fed funds rate up to 4.25-4.50%. In addition, the Fed has signaled that it will keep raising interest rates and maintain them at a higher level for longer than the market has expected, and will not cut interest rates until the Fed is confident that inflation is moving down to its 2% target, even if inflation is showing signs of slowing. According to the Fed Dot Plot, the Fed expects the policy rate to reach 5.1% by the end of 2023, well above the high range of 4.75-5.00% previously expected by the market. The Fed has also signaled no rate cut until 2024, unlike previous market expectations that the Fed would cut its policy rate in the fourth quarter of 2023.

        KResearch views that if the Fed raises interest rates as aggressively as it has signaled, it will increase the chances that the U.S. economy will enter a recession. This is in line with the Fed’s projection that the U.S. economy may grow at a mere 0.5% in 2023 and the unemployment rate will increase to 4.6% in the fourth quarter of 2023. The future direction of monetary policy will depend on inflation and employment data. If the U.S. inflation rate still does not decline significantly, and the unemployment rate does not increase to more than the Fed’s expectation, the Fed is expected to continue to raise interest rates and keep them high throughout 2023 as signaled. However, if the impact of the Fed’s rate hike is greater than the Fed’s assessment, leading to a higher-than-expected increase in unemployment rate and a faster-than-expected decrease in inflation, the Fed may have to weigh the risks of the economy and inflation as well as  adjusting its monetary policy in the future.

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Econ Digest