In 2022, the Federal Reserve introduced seven rate increases from March to December, in an effort to curb the raging inflation and bring it down to the 2% level. As of now, the central bank has pulled the benchmark rate to the 4.25% – 4.50% zone by raising 50 bps in its last FOMC meeting.

Fed’s projections from the December meeting: 5% rate range almost a sure thing

Although there are indications that inflation is subsiding, Fed officials believe that a more steady and consistent decline is essential for a pivot decision. It is because, despite the recent cooling, US inflation is still very much elevated from a historical perspective.

According to the Federal Reserve’s projections from the December meeting, the key benchmark borrowing rate is expected to surge by three-quarters of a percentage point in 2023, reaching a 17-year high of 5-5.25%.

Moreover, there is also a possibility that rates could go even higher. Five officials anticipated a peak target range of 5.25-5.5%, while two policymakers expected rates to jump at the 5.5-5.75% belt, the highest level since 2001. Only two officials projected rates to hover at the lower level of 4.75-5%.

At this point, note that when the Fed shared projections in September 2022, no policymaker forecasted a rate increase of over 5% in 2023.

Inflation and labor market

It is pretty much clear that the ultimate direction of the Federal Reserve’s actions will be determined by inflation as well as the state of the labor market.

As mentioned before, inflation has been slowly easing according to the CPI reports released in the last two months. According to the recent December inflation data, Consumer Price Index (CPI) only showed a 0.1% increase in November, well below the expected 0.3%. The year-over-gain came out at 7.1%, down from the 7.7% gain in October, marking the smallest price gain since December 2021.

But even this positive data means that inflation has only slightly decreased, and prices are still increasing in some areas like housing and services, as per the Department of Labor’s consumer price index.

Regarding the labor market, it remains robust with job creation outpacing population growth and a high number of job openings relative to the number of unemployed people. Fed Chair Jerome Powell has indicated that the strong labor market may be contributing to inflation and could make it more challenging to manage.

However, it is noteworthy that regardless of the overall economic environment, forex or CFD traders can stay afloat and explore the markets wisely. Many platforms, like easymarkets, allow users to benefit from both rising and falling prices, which could in turn offer them a respite during such uncertain market conditions.

Recession looms over 2023

Economists have been warning about the possibility of an impending recession where some areas of the world may already be experiencing one. The Fed’s rate hiking drive amid rising prices is serving as the primary tailwind that could bring an economic downturn.

Schroders, along with other asset management firms and banks, forecasts that global central banks will raise interest rates further before shifting direction, which could potentially hurt economic growth prospects and lead to a recession. The company also predicts that interest rates in the US will reach around 5%, after which the pace of hikes is expected to slow down.