Fed Watch 2023: When will rate hikes slow?


Minneapolis
CNN

The US Federal Reserve was in the harsh spotlight for much of the past year as Federal Reserve Chair Jerome Powell used outright tools such as interest rate hikes and quantitative tightening to curb rising inflation.

2022 is coming to an end, inflation metrics show that some of them may have worked: consumer prices are cooling, home sales have stalled, and some of America’s best-known companies have made plans to slow their role and scale back capital investment.

The latest inflation gauge showed the consumer price index for November came in at 7.1%, down from a 40-year high of 9.1% hit in June; the prices of used cars, lumber and gas – once poster children for painfully steep price increases – have fallen; and house prices and rents are also on a downward trend.

“That idea of ​​peak inflation that people have been talking about for most of the year seems to be starting to hold true,” said Thomas Martin, senior portfolio manager at Globalt Investments. “It’s just how fast does that come down?”

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

The Fed’s Act II begins in a few weeks.

The Fed The recently revised script calls for the Federal Funds Rate, the central bank’s benchmark interest rate, to rise higher but at a slower rate than in recent months.

While the Fed has – finally – picked up some small victories in slowing the economy, the resilient and historically tight labor market remains a thorn in the side of the central bank after seven rate hikes. When the number of jobs available far outstrips those looking for work, wages can rise, which in turn could keep prices high for longer.

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

There are already signs that the labor market is easing: layoffs and hiring have fallen slightly, while layoffs have risen; ongoing claims have risen to their highest level since February; and the number of new jobs added each month has started to slowly decline.

But “structural labor shortages” remain a major headwind, Powell noted in December, attributing the labor shortage to early retirements, care needs, Covid ill health and deaths, and a decline in net immigration.

As a result, employers are reluctant to lay off workers, and other sectors of the economy are showing such strength that the unemployed can be rehired quickly, said Mayfield.

“This latent strength in the jobs market could be why the Fed is tightening too much,” he told CNN. “The rest of the economy is clearly signaling a slowdown to us, an imminent recession. And when you see the Fed revise their unemployment forecasts up and their GDP growth numbers down, they seem to agree.”

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

The December projections showed a more aggressive monetary tightening path with the median forecast Interest rates rise to a new high of 5% to 5.25%, up from 4.5% to 4.75% in September. That would mean Fed officials expect to hike rates half a percent more than three months ago when the Fed’s economic forecasts were last released.

Federal Reserve Chairman Jerome Powell, from right, Lael Brainard, Vice Chair of the Board of Governors for the Federal Reserve System, and John Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, during a break at the Economic Symposium of Jackson Hole in Moran, Wyoming on 8/26/2022.

Policymakers also forecast that PCE inflation, the Fed’s preferred price measure, would remain wide above its 2% target until at least 2025. Further forecasts revealed bleak expectations for the health of the US economy, with Fed officials now predicting that unemployment will rise to 4.6% by the end of 2023 and remain at that level into 2024 . That’s 0.2 percentage points higher than the 4.4% rate expected in September and significantly higher than the current rate of 3.7%.

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

“It’s been pretty impressive how well the consumer has held up over the past 18 months, and if you don’t pull the rug out from under the consumer, you pretty much get the soft landing,” Mayfield said.

“I think it’s a really, really narrow path, and the Fed’s tone [during its December meeting] doesn’t give me much optimism that they can handle this without going into recession. … If a soft landing avoids a recession altogether, then I think that’s quite a difficult task. If this is a milder recession than in recent history, I think that’s still on the horizon.”

The Federal Open Market Committee, the central bank’s monetary policy arm, holds eight regularly scheduled meetings per year. Over the course of two days, the 12-strong group will review economic data, assess financial conditions and assess monetary policy measures to be announced to the public at the conclusion of their second-day meeting, along with a press conference chaired by Chair Powell.

Below are the meetings expected to be held in 2023. Sessions marked with an asterisk feature a summary of economic forecasts, which includes the chart colloquially known as the “dot plot,” which shows where each Fed member expects interest rates to land in the future.

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

— CNN’s Nicole Goodkind contributed to this report.

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