Three Paths for 2023

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As we anticipate what 2023 has in store for investors, consider what the Fed may do. There are three paths the Fed might follow in 2023. The three paths are dictated by the level of overnight interest rates and, more importantly, liquidity for the financial markets. Liquidity has a heavy influence on stock returns.

Let's examine the three paths and consider what they mean for stock prices.

The road map for 2023

The graph below compares the three most probable paths for Fed funds in 2023. The green line tracks the Federal Reserve's guidance for the Fed funds rate. The black line charts investor projections as implied by Fed funds futures. Lastly, the "something breaks" alternative in red is based on prior easing cycles.

Scenario 1: The Fed's expectations

To provide investors transparency into its members' economic and policy outlooks, the Fed publishes a summary of each voting member's economic and Fed funds expectations for the next few years. The latest quarterly guidance on the Fed funds rate, as shown below, is from December 14, 2022 (LINK).