What The Market Expects From Upcoming Fed Meetings

It’s also worth noting that the Fed and markets are fairly aligned overall for 2023. Both the Fed and markets expect more hikes during the early meetings of 2023, and for rates to hold steady for much of the year. The areas of contention really are the May, June and July meetings, when the markets expect the Fed to be done raising rates, and holding them steady, whereas the Fed’s own projections imply that some, or maybe even all, of those meetings could involve further 0.

Come the end of the year, in November or December, the Fed expects to be holding rates steady as inflation moves back to its 2% target. In contrast, the market believes the Fed could be tempted to nudge rates lower, perhaps based on concerns around a U.S. recession. However, here the controversy is not too great. Again, the markets only see a 1 in 3 chance that the Fed decides to cut rates, and even then, by a small amount in November or December.

The Fed is less keen to declare victory too early and continues to worry about wage inflation, price markups, trends in services inflation and other risks for the inflation picture.Based on these worries, the key 2023 Fed meetings to watch most closely may be those in May and December. Fed leaders have hinted that in May they may raise rates once again, but markets think this could be the first of several meetings where the Fed holds rates steady.

Then looking to the Fed’s December meeting, the markets think the Fed may be tempted to cut rates. This isn’t the central case, but there’s a chance of it happening according to the implicit projections of the bond market. The Fed isn’t willing to contemplate 2023 rate cuts yet. Nonetheless, both markets and the Fed are aligned that after a few more small increases, rates should hold steady for much of 2023.

Equally, it’s worth noting in the past, both the Fed and markets have been wrong, and incoming economic data will have far more weight in driving monetary policy than either the Fed’s or the markets’ implicit predictions.

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