The Federal Reserve on Wednesday raised the interest rate a half a point matching most analyst expectations. The increase is lower than the 75-point basis the agency has raised rates in the last four meetings, an indication that inflation is beginning to ease. After two days of meetings, the Fed is still trying to slow down economic growth and fight off inflation.
Since the mark was nearly zero ten months ago, the rate has increased the amount banks charge each other to 4.25-4.5% which is the highest since 2007 and the rate hikes have been the fastest since the early 1980s.
2022 Federal Reserve Rate Increases:
- March 17: 0.25 percentage point
- May 5: 0.50 percentage point
- June 16: 0.75 percentage point
- July 28: 0.75 percentage point
- September 22: 0.75 percentage point
- November 2: 0.75 percentage point
- December 14: 0.50 percentage point
The slowdown in rate hikes combined with a lower-than-expected CPI figure (7.1 versus 7.3 expectations) announced Monday should be good news for the markets, however, we failed to see a rally after the two positive developments. But why? As it has done a lot lately, the Fed put a damper on things. In September, all indications were that the interest rate would peak in the 4.5% to 4.75% range in 2023, however, they revised that range to 5% to 5.25%. This news was not welcomed by investors whose displeasure was seen in falling market prices. The hopes for a "Santa Rally" were dashed away and more market downward pressure could fallout in the coming weeks.
As for the overall economy, the Fed also revised its estimates to a 0.5% growth rate for 2021 and expects about the same next year. This is down from their September prediction of a 1.2% growth rate in 2023, more sour news. Most economists are forecasting a recession in the coming year, albeit of the "mild" variety. The Fed also released they expect inflation to stand at 3.1% by the end of next year, well above its targeted inflation rate of 2%.
Fed Chairman Jerome Powell spoke to the media at 2:30pm EST following the meeting and answered questions about potential future rate hikes.
To the extent we need to keep rates higher and keep them there for longer inflation ... I think that that narrows the runway, but lower inflation readings, if they persist in time, could certainly make it more possible.
Jerome Powell, December 14, 2022
As for the potential for a recession next year and the level of a potential recession, the Fed Chairman had thoughts on that as well.
I just don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not ... it’s not knowable.
Jerome Powell, December 14, 2022
His comments were not reassuring to an already concerned investor base.
The latest news from the Fed drove the S&P quickly down about 20 points or 0.5% which matched the fall of Ethereum (ETH) with Bitcoin (BTC) falling even harder right after the news release. The Dow Jones Industrial Average faired better while the tech-heavy NASDAQ-100 was hit the hardest dropping nearly a full percent.
Looking ahead to 2023
So what will the Fed do next year? Unless inflation figures jump much higher than expected to kick off the new year my guess is that the Fed will do one more rate hike in their next meeting before easing off the rest of 2023. I don't think the Fed will raise the rate by more than half of a point, with a quarter of a point even more likely settling right around the 5% mark.
Federal Reserve 2023 Meetings:
- March 21-22
- May 2-3
- June 13-14
- July 25-26
- September 19-20
- October 31-November 1
- December 12-13
Keep an eye on the US labor market which has remained on fire with another 263K jobs added last month. I think Jerome Powell and company will watch the unemployment figure closely, only trailing inflation numbers in terms of importance. The overall economy is of utmost importance and hard to predict due to unforeseen global macroeconomic news. What will happen with the war in Ukraine? Will COVID raise its ugly head once again? Will supply chain issues persist throughout 2023? What new driving forces will hit the world economy next year?
It is a murky outlook for sure. Historically, most indicators would suggest we are near or at the bottom of the current crypto bear market cycle. The problem is, we have never seen a crypto bear market during a global bear market so how well with past trends hold?
I remain very cautious looking ahead but remain optimistic looking long-term. Don't expect big gains in the near term and accumulate assets for the long-haul expected price appreciation is probably the best strategy in the current crypto environment.
