The Federal Open Market Committee (FOMC) meeting at the end of this month will announce the next move on short-term interest rates on February 1. What can we expect in this meeting and for the year ahead? And what does it mean for investors?
A brief look back
At the beginning of 2022, inflation was widely believed to be transitory. As it continued to rise, the Fed started a series of sharp interest rate increases, as high as 0.75% per session, raising rates from near zero in January 2022 to almost 5%.
The repercussions of the war in Ukraine on commodity prices may have compounded the problem. But the root cause is an over-abundance of money following years of low rates, quantitative easing and stimulus measures.
When consumers begin to spend their savings, businesses respond by hiring more staff. Wages rise amid growing competition for labor. To pay for higher costs, they often raise prices further, leading workers to demand higher pay, creating a self-reinforcing upward trend.
The Fed has been trying to address this cycle using interest rates to apply the “brakes” on a potentially overheating labor market.
Context for the first Fed meeting of 2023
The minutes from the December Fed meeting forecast a range of 4.9%-5.6% for the federal funds rate in 2023.[1] Officials also indicated that the pace of increases may slow to limit risks to the economy. But it seems certain that rates will continue to rise, crossing the 5% level.[2]
How fast, how high and for how long rates will rise depends largely on how inflation and wage growth develop in the initial months of the year.[3]
The latest figures are encouraging. Data released on January 6 show employment at a 16-month high, with wage growth declining to 6.1% from 6.4% in the previous month.[4]
The latest consumer price index (CPI) figures show that inflation cooled further in December, with a headline rate dropping to 6.5% from 7.1% in November and a 9% peak in June. Core inflation (excluding food and fuel) also declined from 6% to 5.7%.[5]
If the price of goods continues to drop as supply chains recover, headline inflation may continue its downward trend into 2023, although inflation in services (excluding housing costs) is still rising (+0.3%).
Expectations and Implications
On the day of the latest inflation data release, Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, indicated that future increases of only 0.25% may be appropriate following the steeper hikes last year.[6]
Based on 30-Day Fed Fund futures pricing data, markets expect two more 0.25% rate hikes in February and March, and no further change until December, when rates begin to decline slowly.[7]
With its dual mandate to control inflation and maintain high employment, the Fed has a difficult path this year.
Tackling inflation with higher interest rates has only been possible due to continued economic growth. But even if rates remain unchanged after March, the quest to cool wage growth may restrict economic activity. The longer rates remain high, the greater the risk that another unexpected crisis, such as the Ukraine war, could tip the US economy into recession.
The Fed is hoping for a “soft landing” as the ideal outcome, or a strong economy combined with cooling wage growth.[8]
With so much uncertainty, investors should adopt the attitude of the Fed: cautious optimism with readiness to change course as circumstances evolve.
The global economy may start to improve as it passes the critical point on inflation, but the journey to recovery is far from complete, let alone assured.
[1] Federal Reserve - https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20221214.pdf
[2]Reuters - https://www.reuters.com/markets/us/fed-meeting-minutes-may-point-rate-hike-endgame-new-debate-phase-2023-01-04/
[3] Forbes - https://www.forbes.com/sites/simonmoore/2022/12/15/fed-sees-further-hikes-in-2023-heres-what-could-change-that/?sh=45245e685a17)
[4] Atlanta Fed - https://www.atlantafed.org/chcs/wage-growth-tracker
[5] U.S. Bureau of Labor Statistics - https://www.bls.gov/news.release/cpi.nr0.htm
[6] Barron’s - https://www.barrons.com/articles/3-fed-presidents-speak-today-51673474854
[7] CME FedWatch - https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[8] Reuters - https://www.reuters.com/markets/us/us-jobs-report-breathes-life-into-feds-soft-landing-scenario-2023-01-06/
Disclaimer
This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.
All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.
The Family Office makes no representation or warranty, express or implied, with respect to any statistics or historical or current financial data, whether created by The Family Office through its own research or quoted from other sources. With respect to any such statistics or data delivered or made available by or on behalf of The Family Office, it is acknowledged that (a) the investor takes full responsibility for making its own evaluation of the materiality of the information and the integrity of the quoted source and (b) the investor has no claim against The Family Office.
Amounts in currencies other than the US Dollar are translated using prevailing market rates as calculated by The Family Office or its service providers and may differ from the rates used by banks. The rates are indicative only and do not reflect the rates at which The Family Office would be prepared to enter into any transactions with other parties.
Certain information contained in this presentation constitutes “forward-looking statements,” which can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “plans,” “estimates,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. To the extent this presentation contains any forecasts, projections, goals, plans and other forward-looking statements, such forward-looking statements are inherently subject to, known and unknown, significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond The Family Office’s control and may cause actual performance, financial results and other projections in the future to differ materially from any projections of future performance, results or achievements expressed or implied by such forward-looking statements. Investors should not place undue reliance on these forward-looking statements. The Family Office undertakes no obligation to update any forward-looking statements to conform to actual results or changes in The Family Office’s expectations, unless required by applicable law.
The Family Office makes no representation or warranty, express or implied, with respect to any financial projection or forecast. With respect to any such projection or forecast delivered or made available by or on behalf of The Family office, it is acknowledged that (a) there are uncertainties inherent in attempting to make such projections and forecasts, (b) the investor is familiar with such uncertainties, (c) the investor takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (d) the investor has no claim against The Family Office.
This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.
The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.