For the first time in 2023, the Federal Reserve Board will be meeting next week, and chances are we will see another increase in short-term rates. We ended last year with the Fed raising rates by a smaller margin compared to their previous meetings. Will the Fed make this move a trend? We closed out 2022 with inflation moving in the right direction, but we are not sure the Fed is ready to acknowledge that they are winning the war.
The economy is definitely poised to slow down in the first half of 2023, and a slower economy also could help us cool inflationary pressures, but there are international events which could throw a wrench in the machinery. In 2022, Russia invading Ukraine was an example of such a wrench. Now we are hearing that China is getting ready to open up their economy by abandoning their “zero-COVID” policy. Of course, this opening is causing a surge in COVID which could result in the opposite effect.
This week we will also get a look at the first reading of economic growth for the last quarter of 2022. You can be sure that the Fed is considering all of these factors and more as they ponder their decision in early February. However, they will also be figuring out how these factors will contribute to their statement after the meeting. As in previous meetings, the statement after the meeting may affect the markets more precipitously than the action of raising rates because the higher rates are expected. We are one week away from finding out. Stay tuned.