In early November, the Federal Reserve hiked rates by 75 bps and told the market three key things:
- The terminal rate will be higher than initially expected;
- Rates will stay higher for longer due to their lagging impact on the economy; and
- A slowdown in the pace of rate increases is likely ahead.
Since then, many Fed members have reiterated that sentiment via press comments and speeches. 💬
As a result, many expected today’s Fed Minutes to be a big nothingburger. And they sort of were, with the market rallying marginally on confirmation that the Fed’s messaging from early November remained consistent.
But under the surface, the minutes provided an interesting insight regarding the Fed’s outlook for the economy in 2023. 👀
This tweet from Dan Greenhaus explains it well:
I feel like maybe this section of the @federalreserve #FOMC minutes should be getting more attention. It's pretty unusual to see this stated so plainly. @steveliesman @ScottWapnerCNBC @lisaabramowicz1 pic.twitter.com/VgGI3wFdoT
— Dan Greenhaus (@DanGreenhaus) November 23, 2022
In it, he points to the part of the minutes that reads, “The staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline.” 📝
In other words…the Fed’s base case is for the U.S. to enter a recession next year. This isn’t surprising, given their policies are trying to push us into one to bring down inflation. But, as Dan pointed out, seeing it explicitly stated is something new.
How’s that for a Thanksgiving table conversation? You can thank us later, folks. 😜