US Fed unlikely to hit pause in 2023 but pace of rate hike to slow down

The Fed minutes were hawkish and there were no incremental surprises versus the Federal Open Markets Committee (FOMC) meeting, Garima Kapoor, Economist, Elara Capital.

FOMC members continued to observe that a restrictive policy stance needs to be maintained until there are concrete signs of inflation coming down to the American Central bank’s 2 percent goal and worried about “misperception” in financial markets that their commitment was flagging, she said.

“This despite the fact that they continued to agree that pace of rate hikes needed to slow from hereon as sufficient progress was made,” said Kapoor.

Overnight, the equity markets shrugged off the hawkish minutes and were cautiously optimistic as they continued to take comfort from less aggressive pace of rate hikes and remained focused on China's opening up led recovery as and when cases subside. Other asset classes like oil, however, continue to be under pressure amid global recessionary fears, analysts said.

The “extreme hawkishness is behind”, given the pockets of a deep slowdown in the housing market, contracting manufacturing activity and new orders, falling lead indicators of inflation and gradual anchoring of inflation expectations, analysts added.

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Rate hike to continue

A tight job market has been a major driver of inflation this year in the US. The recent US Jobs data showed the number of available jobs totaled 10.46 million in November against the expected 10 million job openings.

Analysts said that a tight job market has increased expectations of the continuation of the Fed’s aggressive rate hikes in the new year.

Since April, the Federal Reserve has increased rates by 75 basis points four times in a row, while in the last meeting, it slowed down its aggressive hikes. One basis point is one-hundredth of a percentage point.

During December 13-14 meeting, it raised the benchmark lending rate by half a percentage point. Analysts issued fresh forecasts that showed a hawkish tilt with more hikes projected in 2023 than investors expect. No Fed official forecast rate cuts this year.

"In our view, in the next two meetings, the Fed will resolve to reach the previously indicated terminal rate of 5.1 percent with a small upside bias,” Kapoor said.

The strength of the US labour market, resilient consumer spending, and healthy credit growth suggest it may be too premature to talk of cuts.

“Combining these factors, we expect another 75bps hike over the next two meets (50bps+25bps) in Feb-23 and Mar-23 and a pause thereafter,” Kapoor added.

Analysts said that the stance by the Fed would minimise the upside in the equity market. Globally, investors will keep shifting or keep their investments in debt markets until the Fed changes its stance. However, for Indian markets, the important event is Q3 numbers that will decide the broader trend, analysts added.

Investors now await US December ADP, November trade balance and weekly jobless claims and inflation data for further clues. The US consumer price inflation will be out on 12 January. According to Bloomberg, CPI for December will be at 6.7 percent against 7.1 percent a month ago.

(With inputs from Bloomberg)