The Fed will veer to a less hawkish interest rate hikes than it did in 2022

CME Group’s FedWatch Tool finds that the Fed in late January, when the board’s next FOMC is held, may opt for a less hawkish interest rate hikes than it did in 2022.

According to CME Group’s Tool, despite the fact that 2022 was characterized by substantial interest rate hikes to an extent never before seen in terms of intensity and absolute basis points in a single year, 2023 will be more accommodating in this respect. 

Fed More Than 65% Likely To Cool Rate Hikes At Next Meeting, Says CME FedWatch Tool https://t.co/zGL5wxhAgj pic.twitter.com/bglP0mzlnz

— Forbes Crypto (@ForbesCrypto) December 19, 2022

With this Tweet, Forbes underscores what was argued above and paves the way for hope, in part because while some figures in America, such as the employment rate and prices, have so far held up, it is not certain that this will happen forever. 

This year has been a satisfying one for the US economy if you compare it to how things are going in other countries around the world. 

The United States of America has steadily increased jobs by thousands each month increasing the Confederate country’s employment levels by more than 250,000 jobs in the quarter from September to November alone. 

The recession is now upon us and in Europe, in some countries more so than others in fact, it has already made us feel a foretaste of what it will bring as a gift, price crisis, job crisis, and for those that had any, depleted household savings.

Fed: interest rate hikes for 2023

According to the CME’s FedWatch Tool, after hearing from his officials, Fed Chairman Jerome Powell will raise interest rates by only 25 basis points at the next FOMC in late January.

Should this scenario play out and the rate hike take a softer turn, the values of most risk assets would change. 

Among the assets most at risk of being affected by higher or lower rates in more or less time are stocks and the various cryptocurrencies that would become increasingly less attractive compared to the returns secured by other financial instruments such as savings bonds, funds, etc.

66.1% is the probability that CME FedWatch has predicted at the next FOMC (Federal Open Market Committee) whether the benchmark rate will be raised by 25 basis points and there will be between 450 and 475 basis points (at least according to yesterday’s update). 

However, the possibility that the increase will be more aggressive still holds but in the worst-case scenario the analysis points to an increase of no more than 50 basis points in line with the last one decided by the Federal Reserve this year. 

33.9% is the probability with which the dedicated tool estimates a hawkish 50 basis point increase that could bring the range between 475 and 500 basis points. 

The year 2022 has featured four consecutive interest rate increases of 75 basis points and a 50 basis point increase this month. 

Rate growth this year jumped 4% but next year things will not go that way, the focus according to Chairman Powell will always be maximum but the bulk has been done this year. 

For 2023 the forecast sees the Federal Fund rate reaching 5.1% total while falling back to 4.1 % in two years. 

The forecast that sees next year’s increase only about 100 basis points marks a lateralization of the Fed’s line according to projections made on 14 December. 

2025 will be the year of return to near normalcy at least in the plans, analysts estimate that the rate will return to 3.1%, a full 100 basis points less than it faced this year.

By that date, even the recession that is just around the corner should have run its course and the economy as per the textbooks should be back on track. 

The Bureau of Labor Statistics pointed out that the CPI-urban (Consumer price index-Urban) which is an important measure of inflation fell a bit in November. 

While the month of November was a harbinger of good news for the CPI-U, it must also be said that for the previous months of the year there was an increase in the figure of 7.1%, a clear counter-trend that is still a long way to recover in absolute terms. 

The Board of Labor Statistics, will release new data on the Consumer Price Index for the current month on 12 January (2023) and on that date, we will have a clearer idea of the direction the Federal Reserve will take at the end of the month. 

Should the inflation data be worse than the experts’ forecasts there is a real risk that the Federal Open Market Committee could maintain a 2022-style hard line and opt to raise rates by 50 basis points at the expense of the forecast of +25 basis points.

The latter scenario scares investors and the market in general, which as of today is about to discount a 25 basis point hike, which is lower compared to the last FOMCs, and should we find ourselves in a situation where monetary policy remains aggressive this would affect both equities and the crypto world with further declines to new lows. 

In essence, the CME Group’s FedWatch Tool predicts two scenarios. 

A hawkish scenario that will scale back aggressive policy over time and a milder scenario made up of lighter rises but spread over a longer time frame that would be better received by investors.