Top Factors Influencing Interest Rates in Fed December Meeting

How to Analyze Interest Rate Hikes in FOMC December Meetings

The December Fed meeting is all we were waiting for. Finally, it is on the verge of a conclusion. Here, the first and most essential question is whether the Federal Open Market Committee will reduce the rates or not. The United States economy continuously experiences growth despite the Federal Reserve setting the benchmark Federal fund interest rate at 5.5% in 2023. The Federal Reserve expects their decision on interest rates will eventually slow down this growth. We all know how vital the Fed rates are for the U.S. economy

Key Highlights

  • The Federal Reserve is raising rates because they want to slow down inflation. However, the higher interest rate increases the cost of borrowing, which helps reduce inflation but is a double-edged sword.

  • There is a 97.7% chance the Fed will maintain between 5.25% and 5.5%.

  • In December, the Federal Reserve will update its long-term U.S. economic growth projections, including gross domestic product growth, unemployment rate, interest rates and inflation.

  • Investors must not anticipate more rate hikes as many Fed officials have suggested another increase.

When the Federal Reserve decides to increase the interest rate, it doesn't immediately affect everyone. Still, it usually impacts those taking out new loans, especially first-time home buyers. Again, the impact may not happen all at once, but if interest rates remain high for a long time, the effect will be more noticeable.

According to a Federal Reserve Bank research paper in San Francisco, a 1% increase in interest rate can lead to a 5% increase in the gross domestic product for 12 years after an unexpected hike. Now, these impacts are still visible, and the December fed meeting will conclude soon, so what should we expect from that, and how will it impact the U.S. economy?

What Does the December Fed Meeting Have on the Table?

Federal Open Market Committee (FOMC) meeting just around the corner on December 12-13, 2023, there is a sense of anticipation in the air. The world is holding its breath, hoping that the Federal Reserve will make the decision to maintain interest rates at the current target range of 5.25-5.50%. If this expectation becomes reality, it will be the third consecutive meeting where policymakers have chosen to keep rates steady.

December Fed Meeting Caution by Fed Chairman Jerome Powell

The last meetings show that the fed officials may be cautious if they publicly acknowledge that they are done with rising interest rates. If the interest rates are decreased to some point, there might be many reasons for this. Considering the recent tightening of financial conditions, rates surpassed 8%, and the 10-year treasury surged beyond 5%. However, we see the flip side when the 10-year treasury drops by 86 Basis points. This drop has resulted in the 30-year fixed rate mortgage falling to 7.23%, the lowest level since August. 

1- Why Do We Anticipate That the Federal Reserve Will Be Cautious?

  • Since the dot-com bubble in 2001, the federal fund rate has been at its highest. If we look at the bond market, it also suggests a 97.7% chance that the Fed will remain at its current rate and may hike its rate by 25 basis points. 

  •  The chances are that the Federal Open Market Committee may decrease its rate by at least 25 Basis points by March 2024. The Fed's balance sheet has declined from $8.9 trillion in May 2022 to around $7.8 trillion in November

2- What Are the Odds Against the Fed Raising Interest Rates?

  • Federal Reserve Chairman Jerome Powell, on December 1st, mentioned in a speech that the target interest rate is already high enough to control economic growth. Still, the Fed may make restrictive policies if they like doing so.

  • If you look at the U.S. job market, it remained strong. It created 199,000 new jobs in November, surpassing the expectations of many. The unemployment rate has dropped to 3.7%, implying that U.S. inflation is slowing down. But the sad side is that it has yet to reach the target set by the Fed at 2%.

What Does the Fed Expect from the Market in Return?

From the December Fed meeting, the market is expecting a lot, and the Federal Reserve doesn't want the market to anticipate too much about its future action. To it, the Fed has already suggested one more interest rate hike in its summary of economic projection in September. They may also adjust their plan in the next update.

The current benchmark interest rate has been at its highest since 2001. That comes in the range of 5.25% to 5.5%. Federal Reserve may adopt a more restrictive approach than its policy to counteract potential biases against them.

 If there is no straightforward suggested rate hike by the Federal Reserve, many policymakers have started expecting a downward adjustment for 2023. However, some policymakers also signal a cut for 2024 to prevent the market from making optimistic predictions. With this approach, the Fed is preparing to handle the potential challenges that may occur in the future due to the overly optimistic forecasts by the market.

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Federal Reserve Focus While Evaluating Interest Rate Rise?

In a two-way approach where inflation has not reached 2 %, some officials expressed readiness to reduce the rate, but Powell, on the other hand, has emphasized his commitment to maintaining a restrictive policy until he is assured of reaching its target of 2 percent inflation.

Here, the 'real' cost of money is an essential factor determined by subtracting inflation from interest rate. The Fed benchmark rate has exceeded overall inflation, which signals a restrictive instance for the Fed. Suppose inflation declines and the rate remains at 5.25% to 5.5%. In that case, the monetary policy will eventually reduce the stimulus to the U.S. economy. The lower rates are suitable for investors, but there are many reasons for expecting rate cuts apart from this.

When the Fed began rising rates, investors were more concerned about the repeat of a similar event in 1980, which caused a potential recession. Investors look for a soft landing, which is justified, but they are hoping too much to cut the rates. 

If you look at the latest data, it shows that the Fed has successfully brought down inflation without harming the job market or the U.S. economy; however, the Fed officials know it has slowed the economic growth too much only after it's too late.

What Are the Results of Fed's 11-Times Interest Rate Hike?

The central bank has raised interest rates 11 times between March 2022 and July 2023. In the late September meeting, the Fed paused the interest rate hike. Again, in October and November, the interest rates were unchanged. But the real question is, has the Fed succeeded in putting inflation down in 2023?

The data below answers the questions more simply.

Consumer prices increased 3.2% in October when compared to previous years. The reason behind this decrease was the reduction in energy costs, especially gasoline. When volatile food and energy prices are excluded, the core prices increased 4% annually, slightly down from the 4.1% reported the previous month.

The economy is expected to grow at the rate of 2% less. Core inflation may increase by 0.3%, and the prices of services like hotels, car repairs, and insurance may also rise. This rise may make the Federal Reserve cautious about reducing its interest rate, but this is a matter of time.

Final Words

A coin has two sides, and the Fed Reserve in the current scenario is the same as the coin where the consumer expects interest rates to come down. The Federal Reserve is doing its best to protect the economy by increasing its rate or putting a hold on the decrease. However, the decision is less important than the outcome because the economy will be harmed severely if things don't work in favor of the Federal Reserve. 

Currently, credit card rates are at their record high and are unlikely to decrease soon as the Federal Reserve has adopted a restrictive approach to lower the interest rate. In such a scenario, saving for emergencies and controlling your purchasing is good. The December Fed Meeting has a lot for you, but if you are hoping for a cut in the interest rate. You better put a hold on your sentiments.

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