Fed steps down to 50bp hike, dot plot signals higher for longer

The FOMC on December 14 2022 raised the target range by 50 bps to 4.25-4.50%, stepping down from the four consecutive 75 bp hikes delivered June through November. The statement language was little changed, but the updated Summary of Economic Projections raised the median terminal rate to 5.1% (from 4.6% in September) and lowered 2023 GDP to 0.5% (from 1.2%). Seven of 19 participants projected peak rates above 5.25%.

Markets initially rallied on the pace slow-down, with the S&P 500 up 1% intraday, but reversed sharply during the press conference as Powell emphasized that "incoming data do not suggest inflation is coming down meaningfully" and pushed back on rate cut expectations for 2023. The S&P closed down 0.61%, unwinding the morning rally. Treasury yields were little changed as markets processed the cross-currents of slower pace but higher peak.

The session illustrated the complexity of "hawkish dovishness": slowing the pace provided psychological relief, but the higher dot plot constrained the equity rally potential. The Fed would deliver 25 bp hikes at the next three meetings (February, March, May 2023), reaching 5.00-5.25% before pausing. The December 14 meeting marked the end of the unprecedented 2022 hiking sequence (425 bps in 9 months, the fastest pace since 1980).