The Fed is watching 2023: when rate hikes slow down


Minneapolis
CNN

The Central Bank of America was in bright spotlight for much of the past year, Federal Reserve Chairman Jerome Powell used crude instruments of raising interest rates and quantitative tightening to curb rising inflation.

As 2022 approaches, inflation figures show that some of them may have worked: consumer prices are downHome sales have ground to a halt, and some of America’s best-known companies have considered slowing down their growth and cutting back on capital investment.

The latest inflation reading showed the consumer price index for November at 7.1%, compared to a 40-year high of 9.1% hit in June; the prices of used cars, lumber, and gasoline—once poster children for a painful price hike— went down; house prices and rents also fell.

“The idea of ​​peak inflation that people have been talking about for most of the year is starting to look valid,” said Thomas Martin, senior portfolio manager at Globalt Investments. “How fast does it come off?”

Federal Reserve Board Chairman Jerome Powell at a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, July 27, 2022.

In a few weeks, the second Fed law will come into force.

Fed The recently revised scenario calls for the federal funds rate, the central bank’s benchmark borrowing rate, to rise, but at a slower pace than in the past few months.

While the Fed has finally scored some small wins in slowing the economy, after seven sharp rate hikes, a resilient and historically tight labor market has remained a thorn in the side of the central bank. When the number of jobs available far outnumbers those looking for work, wages can rise, which in turn can keep prices high for longer.

That means the Fed, with its “laser focus on the labor market,” could be “permanently hawkish” in early 2023, said Ross Mayfield, an investment strategy analyst at Baird.

There are already signs that the labor market is softening: the number of layoffs and hiring has decreased, while the number of layoffs has increased; ongoing claims rose to their highest level since February; and the number of jobs added each month began to slowly descend.

However “structural labor shortage” remains a major hurdle, Powell noted in December, attributing the shortage of workers to early retirement, care needs, illness and Covid deaths, and a decline in net immigration.

Thus, employers are hesitant to lay off people, and other areas of the economy are showing such strength that the unemployed can quickly get new jobs. Mayfield said.

“This hidden strength in the labor market could be the reason for the Fed’s over-tightening,” he told CNN. “For us, the rest of the economy signals a slowdown, an imminent recession, very clearly. And when you see the Fed is revising its unemployment forecasts upwards and its GDP growth figures downwards, it seems like they agree.”

He added, “So, I hope they take their own advice and stop pretty soon.”

December forecasts indicated a more aggressive tightening of monetary policy, with the median forecast growth to a new interest rate peak of 5%-5.25%, compared with 4.5%-4.75% in September. This would mean that Fed officials expect to raise rates by half a percentage point more than three months ago, when the Fed’s economic forecasts were last released.

Jerome Powell, Chairman of the US Federal Reserve (from right to left), Lael Brainard, Deputy Chairman of the Board of Governors of the Federal Reserve, and John Williams, President and CEO of the Federal Reserve Bank of New York, during a break at an economic symposium in Jackson Hole in Moran, Wyoming on August 8.  26, 2022.

Politicians also predict what PCE inflationthe Fed’s favorite price indicator will remain far away above its target of 2% through at least 2025. Further forecasts indicated unfavorable expectations about the health of the US economy, and now Fed officials predict that unemployment will rise to 4.6% by the end of 2023 and will remain at this level until 2024. This is 0.2 percentage points higher than the 4.4% they had expected in September and significantly higher than the current 3.7%.

Based on forecasts by the Fed and others economists, the path to the desired “soft landing” of curbing inflation while avoiding a recession or significant layoffs has narrowed.

“It’s impressive how well the consumer has held up over the past 18 months, and not pulling the rug out from under the consumer’s feet is pretty much how you get to a soft landing,” Mayfield said.

“I think it’s a very, very narrow path, and the Fed’s tone [during its December meeting] doesn’t make me very optimistic that they can get through this without hitting a recession. … If a soft landing means avoiding a recession entirely, then I think it’s quite a challenge. If it’s a milder recession than recent history, I think it’s still a possibility.”

The Federal Open Market Committee, the governing body of the central bank, holds eight regularly scheduled meetings per year. Over the course of two days, a 12-member panel reviews economic data, assesses financial conditions, and evaluates monetary policy measures, which are announced to the public after the conclusion of its meeting on the second day, along with a press conference led by Chairman Powell.

Below are meetings tentatively scheduled for 2023. Those marked with asterisks indicate a meeting with the “Economic Forecasts Roundup”, which includes a chart colloquially known as a “scatter plot” that shows where each member of the Fed expects interest rates to be in the future.

  • January 31 – February 1
  • March 21-22*
  • May 2-3
  • June 13-14*
  • July 25-26
  • September 19-20*
  • October 31 – November 1
  • December 12-13*

– Nicole Goodkind of CNN contributed to this report.