FED to Potentially Stop Raising Rates

According to a recent Reuters poll, most economists believe the U.S. Federal Reserve will end its tightening cycle after a 25-basis-point hike at its next two policy meetings. This means the Federal Reserve will likely hold interest rates steady for the rest of the year. This decision is based on the fact that Fed officials broadly agree that the central bank should slow the tightening pace to assess the impact of the rate hikes that have already occurred.

The Federal Reserve raised its benchmark overnight interest rate by 4.25% in 2022, with the bulk of the tightening coming in 75- and 50-basis-point moves.

As inflation continues to decline, 85% of forecasters in the latest Reuters poll predict that the Fed will downshift to a 25-basis-point hike at its January 31st meeting. This would take the policy rate, or the federal funds rate, to the 4.50%-4.75% range. The remaining 15% see a 50-basis-point hike coming in two weeks, but only one was from a U.S. primary dealer bank that deals directly with the Fed. As a result, the fed funds rate is expected to peak at 4.75%-5.00% in March, according to 61 of 90 economists.

This matches interest rate futures data but is 25 basis points lower than the median point for 2023 in the “dot plot” projections issued by Fed policymakers at the end of the December 13th-14th meeting.

While the world is watching the Federal Reserve potentially raise interest rates for the last time, nobody has considered that after they finish raising rates, inflation continues to move higher.

Everybody is disregarding the situation, and probably the worst outcome is them pausing rates, inflation moving higher, and the Federal Reserve is now forced to raise rates even quicker and more urgently.