This week’s FOMC meeting – the last one for 2022 – was perhaps one of the easiest to predict in a while. Weaker than expected CPI figures this week allowed the Fed to release some pressure off the brake pedal as it raised the overnight funds target rate by half a point to 4.5% and to put some perspective around this, the target is 4.25% above where it was this time last year.  While this was exactly what the market predicted, it was the tone and forecasts contained in the policy statement that tell a bigger story.

 

 

The median Fed forecast for the overnight rate next year is 5.1%, which implies another 50-75bps on top of where we are today. In other words, tightening isn’t ending with today’s move. On top of that, the median rate forecast for 2024 is now 4.1%. If you were thinking that the Fed was going to engage in some quick rate cuts next year, the Fed is pushing back against that. The decision to raise rates today was unanimous across Fed officials, but 7 of the 19 members see a peak fed funds rate above 5.25% in 2023.

 

In terms of the economy, the median Fed forecast for inflation is 3.1% next year and 2.5% in 2024. Despite the recent good news on inflation, this forecast suggests that officials don’t see a return to its 2% target anytime soon. The Fed also expects GDP growth of 0.5% in 2023, which would be consistent with a modest recession, but not a deep or prolonged one.

 

Bottom line, the Fed is not as giddy as equity bulls over the latest CPI reports and wanted to push back firmly today. Markets weren’t ready for a hawkish statement, but they got one and that is why equities lost ground after the announcement. If the Fed sticks to its message, it almost guarantees a harder landing in the economy than what many in the market believe. As I will discuss tonight at our last conference call for the year, we have not seen an equity market bottom before a recession starting nor before the end of a tightening cycle.

 

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These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.