When Does The Fed Announce Rate Hikes? Here's What Investors Can Expect From The December Meeting

The Fed announces rates at each of its eight annual meetings. In December, it boosted rates by 0.5%. Here's what that means for investors and what we can all expect moving forward.

When Does The Fed Announce Rate Hikes? Here's What Investors Can Expect From The December Meeting

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Key Takeaways The Federal Open Market Committee meets eight times per year to help manage the economy. At its most recent meeting, the FOMC raised rates by 0.5%. The prevailing opinion sees rates rising through 2023 with mild decreases in 2024 and 2025.

The Federal Open Market Committee (FOMC) is a group composed of the seven members of the Federal Reserve Board, the president of the New York Fed, and the presidents of four other Federal Reserve Banks. The FOMC is responsible for making decisions about interest rates and the U.S. money supply, making its meetings very important for investors to track.

Background The Federal Reserve was formed in 1913 to help reduce the likelihood of future financial panics by establishing more central control of the American monetary system. Over the next century, it gained a more prominent role in helping to actively manage the American economy.

One of the Federal Reserve's most important tasks is managing the money supply. Growing the supply too quickly can cause inflation while restricting it too much can slow the growth of the economy. Typically, the Fed aims for a consistent inflation rate of about 2%. This helps encourage investment and spending without the more painful impacts of inflation kicking in. Many say we're heading towards a new normal of roughly double this rate. The primary way the Fed influences the money supply is by setting a target interest rate — the federal funds rate. This is the rate at which banks lend each other money overnight. Higher rates encourage saving and reduce the money supply, while lower rates encourage borrowing. Interest rates for everything from bonds to credit cards to mortgages depend on the federal funds rate, so FOMC meetings and announcements can have a massive impact on the economy.

When does the Fed meet and announce rate hikes?

By law, the FOMC must meet at least four times annually, however, the FOMC typically meets eight times each year, roughly every five to eight weeks. These meetings are prescheduled, though special meetings can occur in exceptional circumstances.

Prior to each meeting, Federal Reserve staff prepare reports on the economy and potential future developments for FOMC members and nonmember Reserve Bank presidents. During the meeting, members discuss these reports as well as economic trends, such as wage growth, inflation, consumer income and spending, construction, business inventory changes, foreign exchange markets, and more.

The committee makes decisions on whether to maintain or alter fiscal policy to best position the American economy for future growth. Upon reaching a consensus, the FOMC sends a directive to the Federal Reserve Bank of New York, which manages the Federal Reserve System's account for open market operations. The manager of the account uses the directive to guide their actions until the next meeting.

At recent meetings, the FOMC has greatly increased the federal funds rate in an effort to fight inflation.

The most recent FOMC meeting happened on Dec. 13-14.

What happened?

The FOMC met on December 13-14 for the last time in 2022. At the meeting, the committee decided to raise its target interest rate for the federal funds rate to between 4.25% and 4.5%, the highest it's been in fifteen years.

This 0.5% increase was in line with what investors expected, but stocks fell on the news. The increase also broke the Fed's streak of larger, 0.75% rate hikes, which have occurred at each of its past four meetings.

The lower increase was due in part to better inflation data from October and November. Prices increased at a lower rate than expected. However, the FOMC wants more evidence that inflation will continue on its downward path.

Going forward

Another important aspect of FOMC meetings is announcements about expected future actions and economic growth. These are almost as important to the economy as the changes the Fed makes on the day of its meeting.

The Fed expects to keep rates high through 2023, with no reductions in rates until at least 2024. It also estimates that the highest the federal funds rate will reach in 2023 is 5.1%.

What comes after that is far more uncertain. The consensus opinion is that 2024 will see rates drop slightly to 4.1%, followed by a cut to 3.1% in 2025 before it settles to its neutral benchmark of 2.5%.

Despite the consensus, there are a range of opinions from individual members of the FOMC. Seven of the 19 members of the committee expected rates to rise past 5.25%.

The Fed also lowered its expected growth numbers for 2023. It now expects the economy to grow at 0.5% in 2023, barely better than a recession.

The FOMC next meets on Jan. 31 and Feb. 1 of 2023.

What it means for investors

Investors track the FOMC's meetings closely because of the massive impact the committee's decisions can have on the economy.

The information revealed and actions taken at this meeting were nothing surprising. The Fed continued to raise rates and sees economic growth as being relatively slow over the next few years. Though they might not be thrilled about rising interest rates, investors will be thankful for the lack of surprises that could cause upheaval in the market.

The bad news for those interested in stocks is that the Fed sees very little economic growth through the end of 2023. That could cause prices to stagnate.

Another area of concern is the diversity of opinions among members of the FOMC. Many members expect the Fed to increase rates by more than the consensus expectation. If rates have to rise above the current consensus expectation of 5.25%, that would be bad news for investors. That could further slow the economy and increase the chance of a recession.

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