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The Fed Is Poised To Hike Interest Rates Again

Key takeaways

  • The Fed is expected to introduce a 0.25% interest rate hike today, bringing the target up to 4.75%
  • Inflation is already showing signs of cooling, so now the Fed risks higher interest rates causing a recession
  • The shifting global economic landscape means the Fed may need to revisit its rate hikes sooner than planned, and we could even potentially see cuts in the not-too-distant future

The Fed meeting has been taking place this week, with an interest rate announcement expected later today (1 Feb). If it’s a quarter-percentage point increase as anticipated, all signs will be pointing to a slowdown in hikes.

The global economic situation has changed since the Fed first pursued its cat-and-mouse chase over red hot inflation. China has opened back up, gas prices are falling after a mild winter and the IMF’s calling that we’re avoiding a global recession as predicted.

While a slowdown of tightening monetary policy might seem like a good thing, the Fed now faces a delicate line between inflation and recession – and assessing the impact of its massive interest rate staircase from 2022.

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Here’s everything we know ahead of the announcement so far.

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What’s predicted to happen?

Analysts widely expect the Fed to announce a 0.25% increase in interest rates, bringing the target rate to 4.5% – 4.75%.

A cautious sign of positivity lies in how much the basis point rise will be. If the Fed raises interest rates by 25 basis points this would be the third time in a row that it’s put the brakes on its hikes.

President of the New York Fed, John Williams, has said in recent weeks that it will “take time for supply and demand to come back into proper alignment and balance” and that the Fed needed to “stay the course”.

What happened at the last meeting?

The last announcement in December saw the Fed opt for a half-point increase, marking the seventh increase of 2022 and a fifteen-year high in interest rates. Interest levels currently sit at a target range of 4.25% and 4.5%.

What was notable at the last meeting is that the string of 75-basis point rises was broken. While the Fed was playing catch up for most of 2022 as inflation spiralled to the highest levels seen since the 1980s in the US, peaking at 9.1% in June, it has softened to 6.5% in December last year.

The Fed is focused on avoiding a recession, as long as they can also bring down inflation as well. Cynics will look at the parallels between what’s happening now with the aggressive loosening of interest rates and the 2008 financial crisis, but experts are cautiously optimistic about the global economy for 2023.

What are other countries doing?

The US hiking interest rates aren’t out of line with the rest of the world.

The European Central Bank (ECB) is apparently considering a 50-point rate increase – we’ll know more on Thursday. ECB head honcho Christine Lagarde has repeatedly stressed the need for steady rate rises to tame rampant inflation.

In the UK, the Bank of England also plans to raise interest rates to a predicted 4%. If it goes ahead, it will be the tenth increase in the base rate in a row.

Interestingly the Bank of Canada raised rates 25 basis points higher, but has now said it will “hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”. We could see major economies do the same – including the Fed.

Could we see more interest rate hikes in 2023?

When inflation began to run out of control, it was clear that interest rates needed to be raised to try. The Fed has previously signaled the US could see interest rate highs of 5% to 5.25% running into 2024 before they begin to drop again.

This is all in the name of bringing inflation back down to 2%, which Fed chair Jerome Powell has stated several times to be the ultimate goal of the Fed’s monetary tightening policy. Unfortunately, Powell noted back in August this aim would “bring some pain to households and businesses”.

But things have changed since then. The core personal-consumption expenditures price index, the Fed’s measure for making these big decisions, recorded a 4.4% in December from the previous year. November recorded 4.7%, so by all accounts, inflation is trending downward.

What did the IMF report say?

The doom and gloom of news reports have been rampant in recent months. However, the International Monetary Fund (IMF)’s latest report this week has injected some much-needed positivity after upgrading its forecasts for nearly every major economy. The UK was the only one that is projected to shrink.

Their latest report upgraded US growth to 1.4%, up from 1% in October last year, and suggested we’re not going to see a global recession just yet as predicted.

Are we out of the woods? Not yet. The IMF still predicted the US to barely expand in 2024, and unemployment rates are set to peak at 5.2%. However, nobody expected a positive outlook from the IMF on the global economy at this stage.

Will there be a US recession?

Everything the Fed has done since 2021 has been to push the US away from the brink of a deep recession – but the mixed economic outlook isn’t making the path forward easy to find.

JPMorgan Asset Management’s chief global strategist, David Kelly, recently told Bloomberg that the Fed had won its war against inflation and further rate rises risked an economic plunge. Wharton economics professor Jeremy Siegel warned over the weekend that “We have to get no more than 25-basis-points. 50 would be I think a disaster.”

Even the infamous billionaire Elon Musk has weighed in on the topic, tweeting back in November that the Fed “needs to cut interest rates immediately” and that “they are massively amplifying the probability of a severe recession”.

So that’s economics experts, analysts and business leaders that have weighed in on the crisis. While interest rates aren’t expected to go above a quarter-point, the move may still cause some consternation.

The wider effects of last year’s rate rises are also beginning to hit. Personal spending fell 0.2% in the US between November and December, while the housing market has cooled as buyers grappled with more interest to pay on their mortgages.

We may see the Fed have to change tactics again so it can continue to walk the delicate tightrope between inflation and recession, but not without some more data first.

The bottom line

The next 12 months are currently looking fairly uncertain. There aren’t many analysts who are predicting major falls in markets or a deep recession, but by the same token there aren’t any who are forecasting sunshine and rainbows either.

Realistically, it’s likely to be a year where some companies do well and others not so well, and economic data is probably going to be mixed as well.

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