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FOMC preview: Fed to slow pace of rate hikes to 25 basis points


REAL ECONOMY BLOG | January 27, 2023

Authored by RSM US LLP


The easing of inflationary pressures, a slower pace of consumer spending and hiring, and the moderation of wage increases are coalescing in such a fashion that the Federal Open Market Committee next week should be comfortable slowing its rate increases.

We anticipate that the FOMC will increase its policy rate by 25 basis points to a range between to 4.5% and 4.75%.

While we think it’s premature to engage in a strategic pause to restore price stability, that time will arrive soon.

Our base case remains that the Federal Reserve’s policy rate will peak between 5% and 5.25% and stay there until early next year. Given the Fed’s likely deceleration in its rate increases, we think the first opportunity to put in place such a pause will be after the April meeting. That implies a 25-basis-point increase in March and then in April.

It is now appropriate that Federal Reserve Chairman Jerome Powell use his news conference on Wednesday to set the predicate for such a pause.

The upcoming employment cost index report for the fourth quarter, which is the Fed’s preferred metric of wage growth, will most likely affect how far Powell will go in his forward guidance.

Should the employment cost index match the moderation in other wage data, that will be further justification for Powell to point to such a pause.

The policy statement will also likely be subject to one notable change. The outlook paragraph needs to be updated to reflect slower retail sales and the deceleration in inflation with a caveat that it remains above their 2% target.

There will be no update to the Fed’s Summary of Economic Projections at this meeting and we expect no dissents to the 25-basis-point hike at the meeting.

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This article was written by Joseph Brusuelas and originally appeared on 2023-01-27.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/fomc-preview-fed-to-slow-pace-of-rate-hikes-to-25-basis-points/

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