Senior Economist at UOB Group Alvin Liew assesses the publication of the FOMC Minutes of the December meeting.

Key Takeaways

“The key takeaways from the US Federal Reserve’s (Fed) 13/14 Dec 2022 FOMC minutes released overnight (5 Jan, 3am SGT) were: 1) Fed officials were intent on keeping to hiking rates to lower inflation back toward their 2% target, warning against premature loosening and that no rate cuts were expected in 2023, and 2) policymakers highlighted the downshift to a 50bps hike was not a weakening of its resolve to bring inflation back to 2% target and signaled their concerns regarding market views about the future path of the policy Fed Funds Target rate (FFTR), warning that an ‘unwarranted easing in financial conditions’ would impede their efforts to achieve price stability.”

“The minutes also showed Fed policymakers see the continuing need to balance two risks related to the conduct of its monetary policy: the risk of an insufficiently restrictive monetary policy versus the risk of the lagged cumulative effect of policy tightening, even though participants generally still err to the side of caution, which affirmed more hikes in 2023. For the second consecutive meeting, Fed staff economists’ warned the ‘possibility of a [US] recession sometime over the next year as a plausible alternative to the baseline’, but FOMC policymakers again did not provide any expectation (or mention) of a US recession in 2023.”

“FOMC Outlook – The latest FOMC minutes suggest that the Fed’s hawkish leaning remains very much alive at this point, despite the improving CPI trajectory. As such, we keep our existing forecast for a 50bps hike in Jan/Feb FOMC followed by another 25bps hike in Mar FOMC to our projected terminal FFTR level of 5.25%. We expect this terminal rate of 5.25% to last through 2023. The cumulative rate increases in 2022 amounted to 425bps, with another 75bps increases on the cards in 1Q23.”