Recent Fed statements point to continued hawkishness, likely underpriced by the market

We expect the Fed’s policy rate to move into the 5% range by early 2023, putting upward pressure on global interest rates and raising debt risks

A higher interest rate environment carries several implications that multinational firms should incorporate into their plans. The increase in the Fed’s benchmark interest rate will raise interest rates in the US, leading to higher debt servicing costs for households and businesses and a tighter lending environment that will weigh on business investment and consumer spending. Rising US interest rates will push investors toward US assets and drive the value of the US dollar higher; other currencies will therefore depreciate further against the dollar on net between now and Q2 2023. To stem further currency depreciation and rein in inflation, other countries’ central banks will be pushed to hike their own policy rates, resulting in higher interest rates around the world. Higher interest rates are a clear headwind to global growth, and amplify risks of debt crises and financial stress.


  • On Wednesday, November 2, the US Federal Reserve raised its benchmark interest rate, the federal funds rate, by 75 basis points to a range of 3.75 to 4.00%.
  • This was the third consecutive “supersized” 75-basis-point hike and brings the federal funds rate to its highest since 2008.
  • In a press release Wednesday morning, the Fed released a statement indicating its willingness to account for the “cumulative effect” of the aggressive monetary tightening implemented so far—a “dovish” signal that going forward the Fed would slow its monetary tightening.
  • During Jerome Powell’s press conference, however, the Fed Chair made several statements pointing to a more hawkish outlook than markets were expecting, including that the Fed still has “some ways to go” to tame inflation. US stock indexes dropped over the course of the press conference.

Our View

The Fed’s statements last Wednesday—together with other statements by Fed officials, as well as recent US data releases indicating persistent inflation and resilient economic activity—suggest an even higher interest rate environment in 2023. Still, the Fed policy outlook remains very uncertain. Uncertainty regarding the trajectory for US inflation, as well as the timing and degree of any downturn in the US and global economies, means a range of interest rate paths are possible. We see three main scenarios between now and the end of 2023.

  • Base case: In our base case, the Fed raises its benchmark interest rate by smaller increments—25 or 50 basis points—at each of its meetings between now and July 2023. Following this tightening cycle, the Fed holds rates at 5.75% through the end of the year. This scenario is consistent with the messages communicated at the Fed’s November meeting. It comes about if US inflation remains high but the US economy avoids a severe recession. This is a high interest rate environment that will weigh on growth in the US and global economies.
  • Hawkish surprise: There are a range of scenarios in which the Fed may hike even more aggressively than in our base case. Under one such scenario, continued increases in headline or core inflation drive the Fed to hike in 50- or 75-basis-point increments through July 2023. The Fed’s benchmark rate is in the 6% range throughout 2023, which would constitute the tightest financing environment since 2000 and significantly raise the probability of a global debt crisis or balance sheet recession, which could occur in 2023 or 2024.
  • Dovish pivot: Likewise, there exists a range of scenarios in which the Fed could begin dropping its benchmark interest rate next year. This kind of scenario most likely takes place if the US enters a severe recession or begins seeing signs of severe financial stress that compels the Fed to drop interest rates. A dovish pivot therefore isn’t a “good” scenario, but would ease some pressure on the global economy over the medium term (2024 and beyond).

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