One and Done for Fed Rate Hikes in 2023?

January 23, 2023

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4:53 am

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17 comments

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Economics

Rate hike probabilities for the February 1 FOMC meeting.

The above graph is from CME Fedwatch.

The market is nearly 100 percent certain of a rate hike in February to the range 4.50-4.75 percent.

Let’s turn our focus to December.

Target Rate Probabilities for December 2023

The market says it’s odd-on for the Fed to cut rates later this year.

So is it one and done then one cut? Not quite.

Target Rate Probabilities for June 2023

The market believes there is a 90.1 percent chance the Fed gets in at least one more hike in 2023.

There’s a 36.4 percent chance of 2 or more quarter-point hikes through June.

Not One And Done

The market does not expect one and done.

However, there’s a 56.9 percent chance that net hikes for the year are zero.

Whatever hikes the Fed does get in through June, the market expects will be taken back.

Will the Fed Get to 4.75-5.00 Percent or Higher?

I expect they will if for no other reason than the Fed can be stubborn as hell when it makes pronouncements.

It kept QE going when it was clear that it shouldn’t.

The Fed is not really data dependent. It does what it wants and makes excuses for it.

However, if there is a credit event of some sort, the Fed will not get in those June hikes. February is a done deal.

This post originated at MishTalk.Com.

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blackswan

1 year ago

The main reason they overdo it always is because they only know we are in recession 6 months later… there’s no other way to know when to stop so they always overdo it. We could replace the fed by a Commodore 64 that tracks the inflation easily.

Christoball

1 year ago

Even though we have been in a recession for 3-6 months, the FED will want to get whatever higher rates are necessary to combat inflation before a recession is officially called. It is hard to raise rates after a recession call.

KidHorn

1 year ago

It’s almost certain the FED will over-hike. Why? because they always go too far in either direction. When will they stop raising rates? When it’s obvious to everyone else they went too far. We’re not there yet.

Zardoz

1 year ago

Reply to KidHorn

Can’t know what the limit is if you don’t go too far.

MPO45

1 year ago

Reply to Zardoz

An old Jerry Seinfeld joke, “How do they know what Maximum Strength Aspirin is? Do they find out how much will kill you and back it off just a bit?”

jfpersona

1 year ago

Reply to KidHorn

This sort of thing always reminds me of a good Calvin and Hobbes strip:

Calvin asks his dad how they set those max weight signs for crossing a bridge and his dad says they build the bridge, then drive bigger and bigger trucks over it until it collapses. Then they know the max weight and they rebuild the bridge again. Calvin follows up with “Oh. I should have known.” – and his mom comes in at the end to yell at the dad about just telling Calvin that he doesn’t know an answer to one of his questions.

MPO45

1 year ago

The Fed isn’t fighting the ghost of inflation past, it is fighting the ghost of inflation future.

Boomers are defined as those people born between 1945 thru 1964. Someone born in 1945 is 78 this year and someone born in 1964 is 59 this year. If the youngest boomers are now 59 then it means in 3 years they will be 62 and able to start taking social security. Google “how many people take social security at 62” and let me know what that number will be and that’s the number of people that will vanish from the labor force starting in 2026 but could happen sooner. From that point on, the labor shortage will get worse and worse because no one is addressing the issue in any way shape or form and more and more boomers will stack onto social security.

What happens when the labor force is depleted by millions annually but consumer demand continues to grow and grow? One key answer is inflation. I highly doubt the Fed ever pivots in any significant way, all I expect is for the Fed to stop hiking. Of course, if a black swan event happens like Putin blows nukes then who knows what will happen but we’ll have bigger problems by then anyway.

xbizo

1 year ago

Reply to MPO45

yes, but… inflation will be offset by productivity gains. Robotics are set to be implemented exponentially, especially with wages up and onshoring. Software, cell phones, etc are saving tons of time already that is not being measured. 2 million immigrants per year is deflationary for wages.

Because retirees spend differently, there might be a depression in cars, home remodels and appliance sales while we have a boom in elder care, medicine, cosmetics, travel and leisure. They will have thirty years to spend their savings down.

Generational wealth transfer needs study to know about long term consumer demand. Obviously inheritance transfers will be growing for the next 20 years and then start receding. Globally, population levels off in 20 years, removing an inflation driver.

Do agree that there is going to be an increasing shortage of professionals in the workforce as boomers retire, but a LOT of that has taken place now. Just the tail end of boomers left, not the peak.

We just need to work off this extra trillion in helicopter money and we back to normal imo.

MPO45

1 year ago

Reply to xbizo

Robotics are set to be implemented exponentially…

I have been hearing this for the past decade. Truckers were all going to be jobless because trucks can drive themselves…still waiting. The first robotics were put in a GM plant in the 60s and 60 years later those plants aren’t fully automated. But let’s assume this robotic fantasy is true, who is going to architect, design, code, manufacture, transport, deploy and maintain all these robots? We don’t have enough software programmers now let alone engineers to architect and design robots moving forward and 2 million uneducated immigrants wont help either.

This problem isn’t unique to the US, China has a demographic time bomb on its hands right now. Germany is begging for labor in Europe as is the UK. The places with millions of freshly minted kids have poor infrastructure and education systems so that won’t help either.

As for the peak boomer, I think Mish frequently writes that there are 22 million people over the age of 65 still working and poised to retire at some point. Every damn that breaks starts with a trickle then it happens all at once….we are all playing “boomer roulette” right now waiting for the trigger to get pulled.

xbizo

1 year ago

Reply to MPO45

It’s little robots all over the place. Some a few dollars or free. Others about $25,000. Kiosks for car parking and ordering, automatic French fry makers, pizza manufacturers, coffee baristas. Siri on your phone. GPS in cars and drones. How many programmers do you need to operate your GPS?

Some industrial robots now calc out at $4 per hour over their lifetimes. That will replace $15 labor pretty quick. Companies will train the robot operators.

Drone cars will happen in fifteen years or so. All those boomers losing their driving skills and the millennials in urban areas are going to subscribe to drone taxi services. Mobility without owning a car. Just ask Siri for a ride. Gonna be hell on car volumes and eliminate parking lots. That’s really deflationary.

Disagree on boomer roulette. Some are still going to work until they are 80. The ones on the fence have been pushed off during the great lockdown. Past the peak. No cliff ahead.

MPO45

1 year ago

Reply to xbizo

How many programmers do you need to operate your GPS?

Thousands! You think GPS satellites maintain themselves? They have to do periodic orbital burns to stay in position. Who updates the roads on your GPS maps? You do know roads change as do speed limits, traffic lights, road hazards, etc. Who do you think maintains the cell towers that connect your cell phone to the cell tower to the web servers that host the data?

For every piece of ‘automation’ there are thousands of people on the back end that you don’t see that are doing “stuff” to maintain and update it as well as create new. Computers were mass produced and put in homes in the 90s and in 2023 most stuff has bare minimum automation.

Of course this whole discussion is moot, go ahead and plan your future on robots, low inflation and fantasy optimism and I’ll plan it according to what I think is coming: labor shortages, services/goods shortages and high inflation.

xbizo

1 year ago

Reply to MPO45

yeah but… the leverage is amazing. millions of techies to one user. We’re talking about automation deepening its penetration beyond experts needed to run it, not a CNC machine that got programmed three times a day in the 1990s.

there’s near term and short term. Right now, inflation is a labor supply problem brought on by the great lockdown. Especially losing those boomers to retirement and parents to childcare / parentcare, but it is not enduring. Do need good immigration policy to improve supply. It’s the kids arriving today in fifteen years (they go to school and college after all) and well trained now (Russia, Ukraine, India?).

Quagmire46

1 year ago

Reply to MPO45

I keep thinking about the automation in food production compared with just a short time ago. Farm machinery costing huge amounts replacing workers and doing a great job. I just see it as a progression from human labor to robot labor. It ain’t slowing down .

MJS357

1 year ago

Reply to xbizo

Too far away to count on robotic productivity, growth, profits, and implementation into daily service sector economy. I can’t Siri to stop outting commas after every other word when I use talk to text.

MJS357

1 year ago

The Fed has said over and over rates to be above 5% as they, and we, know “sticky” inflation will persist throughout the year. I don’t believe for a second any of the spending bills passed last year (Chips, Inflation reduction, or Omnibus) are deficit neutral and will cause additional inflation pressure soonest. Never mind the price/wage spiral I believe will finally be addressed when new services price/wage numbers come in this month early next. My God, $4.71 for a small coffee and donut at Dunkin? Good luck to Wall Street and their persistent daily dinner bell ringing for all to come eat their Hopium salad of nonsense.

KidHorn

1 year ago

Reply to MJS357

The inflation reduction act is absurdly named. It should be called the inflation fueling act. I guess it’s consistent with the affordable care act which made health care much more expensive for most.

xbizo

1 year ago

Reply to KidHorn

yeah chunks of it are moving chess pieces around the board, but… We do address future industries and make investing in the U.S. a priority. Without subsidy, U.S. cannot compete broadly with China. Period. It does help improve the electric grid that is falling apart. Europe should stop complaining and copy it.

One and Done for Fed Rate Hikes in 2023?

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