Fed to Continue Aggressive Interest Rate Hikes in 2023 and Beyond

The US Federal Reserve (Fed) has been engaged in an aggressive series of interest-rate hikes over the past year, and forecasts indicate that this trend is likely to continue in the near future.[0] According to a Reuters poll of economists, the consensus among analysts is that the Fed will raise rates at least twice more before the end of 2023, with none predicting a rate reduction. Additionally, Bank of America (Bofa) Global Research had predicted that the terminal rate would be between 5.0% to 5.25% at the end of 2023, while J.P. Morgan had previously predicted a funds rate of 5.1% by the end of June.[1]

European Investment Bank has also forecasted a rate increase in Europe in March, signaling the end of the present cycle of rate hikes, with the policy aim remaining at 4.75-5%.[1] Goldman Sachs has now forecast the Fed to hike rates by 25 basis points (bps) each at the March, May and June meetings, while Bank of America has predicted that the Fed will increase interest rates another three times this year.

Since March 2022, the Federal Reserve has increased its policy rate eight times, culminating in a range of 4.5%-4.75% on February 1 of this year. This followed the lowering of the lower bound to around 0% when the pandemic began.[2] At the end of 2020, the central bank predicted that policy rates would reach a maximum of 5.1% and would not be decreased in 2023.[2]

In addition, traders on Wall Street are placing bets that the Federal Reserve will hike interest rates beyond 6% this year, with a particularly large bet of $18 million placed that the Feds will hike the interest rate to 6% by September.[3]

The Fed has promised to stay the course keeping interest rates elevated until inflation is back under control, and Fed Jerome Powell indicated that rates were likely to move higher following the 25-basis-point hike on Feb. 1. Michelle Bowman, a Fed Governor, said the central bank should keep raising interest rates to reduce inflation which remains “much too high.”

For the Fed to successfully contain inflation by year-end, they should define success as a one-year period where the core CPI measure is in the vicinity of 2 percent.[4] In addition, the Fed should announce its intent to conduct monetary policy in a manner to confine the growth in current dollar spending (GDP) to no more than 4 percent.[4]

0. “Outlook for US fixed income and equities Franklin Templeton” Beyond Bulls & Bears, 12 Feb. 2023, https://global.beyondbullsandbears.com/2023/02/13/outlook-for-us-fixed-income-and-equities-amid-tighter-financial-conditions/

1. “Goldman Sachs forecasts three additional US Fed rate hikes but no reductions in 2023” Business Upturn, 17 Feb. 2023, https://www.businessupturn.com/world/goldman-sachs-forecasts-three-additional-us-fed-rate-hikes-but-no-reductions-in-2023/

2. “Fed Swaps Price in March and May Rate Hikes, Expect Peak at 5.3%” Yahoo! Voices, 17 Feb. 2023, https://www.yahoo.com/now/fed-swaps-price-march-may-154025367.html

3. “Wall Street Traders Betting Interest Rate Will Surpass 6% This Year” Coinspeaker, 9 Feb. 2023, https://www.coinspeaker.com/wall-street-traders-interest-rate/

4. “Will the Federal Reserve Hit Its Year-End Inflation Target?” The Epoch Times, 17 Feb. 2023, https://www.theepochtimes.com/will-the-federal-reserve-hit-its-year-end-inflation-target_5063967.html