Federal Reserve: December FOMC Rate Decision

FOMC, USD, SPX Talking Points:

The Federal Reserve convened for the December rate decision amidst a backdrop of rising inflation, increasing the odds more rate hikes in 2022 and 2023.
The expectation for today is for the Fed to make a hawkish policy shift. The big question is how many rate hikes the FOMC will signal for 2022. The expectation for faster tapering of asset purchases appears to be baked in to the equation at this point.
This is a live article and will update as details and drivers flow from the statement released at 2PM ET and the press conference beginning at 2:30 PM ET. For the most recent update, scroll to the bottom of this article.

12:45 PM ET

We’re about an hour away from the December FOMC rate decision and markets appear to be harboring a hawkish expectation for the Fed at this meeting.

This would fly in stark contrast to the bank’s stance ever since Covid came into the equation. There was a brief period of hawkishness at the FOMC in late-2018 that quickly left markets after a 20% sell-off in the S&P 500 in Q4, 2018.

From that episode are a few items of note that remain relevant today: Despite markets showing pressure ahead of that December 2018 rate hike, the bank still hiked anyways. The way that they tried to buffer the matter was by forecasting two rate hikes in 2019 as opposed to the three they were previously forecasting.

So, from that, clear evidence of how the Fed uses the dot plot matrix to manage expectations. And another, the manner in which Chair Powell and the Fed stuck to their plan even in the face of bearish equity markets. And then, of course, how the Fed shifted course so quickly to cut rates three times in 2019 after hiking four times in 2018; this highlights how responsive the bank can be to risk-off market behaviors.

It seems that the last thing that the FOMC would want to do is roil equity markets, and this has been the case for some time.

The Expectation for Today

1:15 PM ET

The wide expectation is that the Fed will make a hawkish shift today and going by rates markets, those expectations are fairly high. As of this writing, there’s a 62% probability of at least three rate hikes next year. And there’s a 32.2% probability of four hikes or more next year.

This is in stark contrast to the Fed’s dot plot matrix from the September rate decision that highlighted one possible hike in 2022.

Target Rate Probabilities for December, 2022 FOMC Rate Decision

Chart prepared by James Stanley; data from CME Fedwatch

The most recent dot plot matrix from the Fed, issued in September, showed that the bank had a median expectation for one hike in 2022 along with three more in 2023.

September FOMC Dot Plot Matrix

Chart prepared by James Stanley; data from the Federal Reserve

Statement and Projections Released

2:05 PM ET

The Federal Reserve has released their statement for the December rate decision. The bank is going to double the size of asset purchase taper from 15 to 30 Billion per month.

The Fed also increased expectations for rate hikes next year, with between two to three hikes for 2022. The updated Summary of Economic Projections (SEP) is below:

December FOMC Dot Plot Matrix

Chart prepared by James Stanley; data from the Federal Reserve

Immediate Reactions

2:15 PM ET

The US Dollar didn’t want to wait for the FOMC statement as buyers began to push ahead of the release. A quick spike developed right after the statement had dropped, but that move couldn’t hold as price action has pushed right back to short-term support, taken from prior resistance around 96.59.

I had talked about some of the major pairs sitting at significant support zones. Today’s statement hasn’t provided enough motivation for EUR/USD or GBP/USD to break down. But, there are rate decisions out of both economies tomorrow morning so this theme remains center-stage for now.