With some Fed officials corroborating investors’ view of a quarter point increase, Wednesday’s FOMC gathering will likely be among the highlights of the week. Market participants will be eager to find out whether the consensus of policymakers also agrees with their view on the path of interest rates after the meeting, as this is where opinions between the financial community and the Fed diverge. What will the Fed signal and how may the market respond?
A bone of contention
At their last meeting for 2022, Fed officials raised interest rates by 50bps after four consecutive 75bps hikes. However, despite the smaller increment, they sang a hawkish song, with the gist of the lyrics being that interest rates may rise above 5%, while Fed Chair Powell’s solo part at the press conference intended to push back against pivot expectations.

Since then, even if some policymakers admitted that shifting to a lower gear at the upcoming gathering may be appropriate, most of them have been adamantly sticking to their guns that interest rates will probably rise to slightly above 5%, in line with the December “dot plot”, and that they will stay there for a prolonged period thereafter. However, this has been a bone of contention as the market insists that interest rates are likely to rise to the 4.75-5.00% range, and that 50bps worth of rate cuts may be warranted by the end of the year.