Fed Downshifts to 50 bps but Stays Hawkish
What Happened
On December 14 the Fed raised rates by 50 bps to 4.25–4.50%, ending its string of 75 bps moves. The median dot plot pointed to a 5.1% terminal rate in 2023, higher than markets had priced, and Chair Powell stressed that inflation remained too high.
What It Means
The Fed opted for smaller steps but a longer climb. Equities faded after the statement as traders absorbed the higher-for-longer message, while the two-year yield held near 4.25%. The central bank wants flexibility to keep going without shocking credit.
What I Think
Downshifting is not dovish pivoting. I see the Fed trying to preserve optionality while watching lags. If labor stays tight, another pair of quarter-point hikes is plausible, but the bar for re-accelerating is high unless inflation re-accelerates.
Market Terms
- Downshift to 50 bps – Ending the string of 75 bp hikes.
- Terminal dot at 5.1% – Higher peak projected for 2023.
- Higher-for-longer message – Emphasis that inflation is still too high.
- Optionality on quarters – Keeping flexibility for more 25 bp moves.
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