2023 FOMC Review

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As the final FOMC meeting of 2023 concluded successfully, market participants widely regarded it as a precious Christmas gift. At this moment, many market participants believe that a rate cut has become an inevitable choice. What reasons have led to this widely held view in the market? Let's review the evolution of the Federal Reserve's interest rate decisions and economic outlook throughout the eight FOMC meetings this year. What significant changes have occurred? Are market forecasts aligned with the Fed's pace? Let us carefully analyze these details to uncover the truth.

Year in Review: 2023

Since the beginning of 2022-23, the Federal Reserve has implemented nearly a dozen rate hikes in an effort to curb the overheating momentum of the US economy and combat last year's peak inflation rate of 9%. This has been the most aggressive tightening action taken by the Federal Reserve since the 1980s, resulting in some turbulence in the banking industry and stock market, and impacting the global economy.

As of now, there have been four rate hikes in 2023, occurring during the FOMC meetings in February, March, May, and July. These actions indicate that in the first half of the year, the Federal Reserve still perceived elevated inflation pressures and deemed it necessary to control them through rate hikes. However, in the second half of the year, interest rates remained relatively stable for a longer period, while inflation showed a clear downward trend. The market gradually recognized that the rate hike cycle had reached its peak and even began contemplating when and to what extent rate cuts would commence.

This shift reflects the market's observation and expectations regarding the economic situation, suggesting that inflation pressures have gradually diminished and the rate hike cycle is nearing its end. The market has also started considering the timing and magnitude of rate cuts to adapt to the new economic changes.

Dot Plot Data

According to the chart, the dot plots in the first three quarters continuously revised upward the interest rate projections for 2023 and 2024. This is due to the persistent presence of inflation concerns without a clear downward trend, coupled with a consistently strong labor market. As a result, the Federal Reserve has maintained its stance on rate hikes and increased the rate forecasts for the upcoming year.

Although there was a pause in rate hikes during the June meeting, the market generally viewed it as a temporary hawkish pause, as a 25 basis point hike was still implemented in July. While there was another pause in rate hikes during the September meeting, where the slogan was "higher for longer," officials had previously anticipated further rate adjustments, ranging from 5.5% to 5.75%. However, in the final two meetings of the year, there were no further rate hikes, and the rates remained at their peak levels. This clearly signaled a shift from a hawkish to a dovish stance, triggering market enthusiasm and increasing the market's speculation on future rate cuts in the coming year.

What Happened at the Dec. FOMC Meeting?

During the December FOMC meeting, 19 Federal Reserve officials provided their forecasts, and out of those, 16 individuals projected that interest rates would decrease to below 5.0% next year.

Among them, five officials anticipated rates to be between 4.75% and 5.0%, implying two rate cuts of 25 basis points each. Six officials predicted rates to be between 4.50% and 4.85%, which would amount to three rate cuts. Four officials projected rates to be between 4.25% and 4.50%, indicating four rate cuts. One official even expected rates to be below 4.0%.

Out of the 19 officials, a total of 11, accounting for nearly 53%, expected at least three rate cuts next year. Additionally, five officials, representing around 26%, projected at least four rate cuts.

Do the FED and Market Expectations Align?

In the dot plot, officials projected an average interest rate of 4.6% for next year, indicating an expectation of three rate cuts. This forecast gradually approached the market's previous expectation of five rate cuts, reflecting recognition of the current inflation situation.

However, the market always desires more. Following Powell's press conference, according to data from the CME, market expectations for year-end interest rates in the next year reached 3.9%, equivalent to a range of 3.75% to 4%. This implies a 150-basis point reduction from the current rates, which is equivalent to six rate cuts.

The Fed's forecast suggests that rate cuts will begin in the autumn of 2024 (assuming a 25-basis point cut each time), whereas market possibilities indicate that rate cuts could be implemented as early as spring. Market participants are eagerly anticipating the future economic trajectory, hoping that the central bank will take action sooner to stimulate economic activity.

2024 FOMC Meeting Calendar

2024 FOMC Voting Members

The Federal Open Market Committee (FOMC) consists of twelve members, including seven members of the Board of Governors of the Federal Reserve System, the President of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank Presidents who serve one-year terms on a rotating basis. The rotating seats are represented by the following groups of banks, with one Bank President from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Non-voting Reserve Bank Presidents attend committee meetings, participate in discussions, and contribute to the committee's assessment of the economy and policy choices.

Current Committee Members:

Jerome H. Powell, Chair of the Board
John C. Williams, Vice Chair - New York
Michael S. Barr, Board Member
Michelle W. Bowman, Board Member
Lisa D. Cook, Board Member
Christopher J. Waller, Board Member
Adriana D. Kugler, Board Member
Philip N. Jefferson, Board Member
Patrick Harker - Philadelphia
Austan D. Goolsbee - Chicago
Lorie K. Logan - Dallas
Neel Kashkari - Minneapolis

The rotating seats for 2024 will be filled by the Presidents of the Richmond, Cleveland, Atlanta, and San Francisco Federal Reserve Banks.

Market Expectations for January Meeting

As of December 18, the probability of an adjustment to the target interest rate in the January 2024 meeting is as follows:

5.00% - 5.25%: 10.3% (increased by 6.3% from the previous week's 4%)
5.25% - 5.50%: 89.7% (decreased by 3.5% from the previous week's 93.2%)
5.50% - 5.75%: 0% (decreased by 2.8% from the previous week's 2.8%)

Based on the data above, the market anticipates no possibility of a rate hike at this meeting. It is generally expected that the Federal Reserve will maintain the target interest rate within the range of 5.25% - 5.50%, with a low probability of a rate cut.

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Facilitating the discovery of market prices as buy and sell orders continuously match in the market, reflecting the market's perception of asset value.

3 Possible Result

Higher Interest Rate

• USD: Fuel U.S. dollar gains

• Gold: Gold prices may decline.

Forecasted Rate

• USD, Gold: May remain relatively stable or be influenced by other factors.

Lower Interest Rate

• USD: Decline in the value

• Gold: Potential increase in gold prices

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