There’s a big question brewing in the markets right now, and one in which many economists are somewhat split. The notion of whether the Fed will raise rates again in 2023 or take a “wait and see” approach to its already immense interest rate hikes remains to be seen.
Most economists appear to be taking the Federal Reserve at its word. At the latest Federal Market Open Committee (FOMC) meeting yesterday, the Fed outlined expectations that one more rate hike is likely due for this year. The Fed’s so-called dot plot, in which Federal Reserve policymakers outline their expectations for where rates are headed in the intermediate term, underscores the likelihood of another quarter-point rate hike this year.
Such a rate hike would bring the Fed’s overnight lending rate to a range of 5.75% to 6%, marking the highest rates since before the Great Recession.
The FOMC wasn’t completely set on this stance, however. Notably, seven out of the 19 policymakers on the committee called for rates to be held steady this year. Hence, the debate.
Let’s dive into what investors should consider when thinking about interest rates this year.
Will the Fed Raise Rates Again in 2023?
The Federal Reserve’s talking points have been relatively consistent. The FOMC has reliably utilized a data-driven approach to raising interest rates. In other words, if inflation data, jobs data, or other factors suggest inflation could be heating up again, more rate hikes may be necessary from here.
Now, it’s worth noting that even the Fed has acknowledged that rates are constricting demand right now. Additionally, there are so-called “long and variable lags” when it comes to seeing the effects of these rate hikes flow through to the economy. Accordingly, there is some appetite for waiting and seeing how things continue to progress. And with inflation coming down meaningfully from last year’s highs of roughly 9% (to around 4% right now), that’s still double the Fed’s target rate of 2%.
For good or bad, the Fed appears to be very serious about hitting its 2% target. For investors, that could certainly mean another rate hike is on the horizon. With 2-year Treasurys now yielding more than 5.1%, it appears that the bond market has sufficiently priced in rates around these levels (a little below) for the next two years. Thus, while the bond market isn’t the final say on where interest rates will be over the next two years, I think investors need to brace for rates exceeding 5% for the foreseeable future.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
