Fed watch 2023: When will rate hikes slow

Minneapolis
CNN
—

The US central bank found itself under a dazzling spotlight for much of the past year, as Federal Reserve Chairman Jerome Powell has used blunt tools of interest rate hikes and quantitative tightening to rein in soaring inflation.

As 2022 draws to a close, inflation measures show that some of these elements may have worked: consumer prices are fallinghome sales have stalled and some of America’s best-known companies plan to slow turnover and reduce capital investments.

The latest inflation gauge showed the consumer price index for November came in at 7.1%, down from the 40-year high of 9.1% reached in June; the prices of used cars, wood and gasoline – once the posters of the children for the painfully steep price increases – went down; and house prices and rents also followed a downward trajectory.

“This idea of peak inflation, which people talk about for most of the year, is starting to look valid,” said Thomas Martin, senior portfolio manager at Globalt Investments. “It’s just how fast it goes down?”

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

In a few weeks, Act II of the Fed will begin.

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

While the Fed has – finally – scored some small victories in slowing the economy, after seven bumper rate hikes, the robust and historically tight labor market has remained a thorn in the side of the central bank. When the number of available jobs far exceeds the number of people looking for work, wages may rise, which, in turn, could keep prices higher for longer.

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

There are already signs that the labor market is softening: quits and employees have fallen slightly, while layoffs have increased; continuing claims increased to their highest level since February; and the number of jobs added each month started to drop slowly.

However, a “structural labor shortage” It remains a major headwind, Powell noted in December, attributing the lack of workers to early retirements, care needs, Covid illnesses and deaths and a drop in net immigration.

Thus, employers are reluctant to lay off, and other sectors of the economy are showing such strength that those who are unemployed can be rehired quickly, said Mayfield.

“This latent labor market strength could be the reason the Fed is tightening too much,” he told CNN. “For us, the rest of the economy is very clearly signaling a slowdown, an impending recession. And when you see the Fed revising its unemployment projections up, revising its GDP growth figure down, it seems like they agree.

He added: “So hopefully they take their own advice and stop soon enough.”

December projections indicated a more aggressive monetary tightening path, the median forecast reaching a new interest rate peak of 5% to 5.25%, compared to 4.5% to 4.75% in September. That would mean Fed officials expect to raise rates half a percent more than they did three months ago, when the Fed’s economic forecast was last released. time.

U.S. Federal Reserve Chairman Jerome Powell, from right, Lael Brainard, Deputy Chairman of the Federal Reserve Board of Governors, and John Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, during a break at the Jackson Hole Economic Symposium in Moran, Wyoming on Aug. 28, 2019. 26, 2022.

Policy makers also planned this PCE inflationthe Fed’s preferred price indicator, would remain far above its 2% target until at least 2025. unemployment will increase to 4.6% by the end of 2023 and staying at that level through 2024. That’s 0.2 percentage points higher than the 4.4% rate they were expecting in September and significantly higher higher than the current rate of 3.7%.

Based on drafts by Fed officials and other Economists say the path has narrowed for the desired “soft landing” of keeping inflation under control while avoiding recession or deep layoffs.

“It’s been pretty impressive to see how resilient the consumer has been over the past 18 months, and not cutting the rug out from under the consumer is pretty much how you get to a soft landing,” said Mayfield.

“I think it’s a really, really narrow road, and the tone of the Fed [during its December meeting] doesn’t give me much optimism that they can pull through without falling into a recession. … If a soft landing avoids a recession altogether, then I think that’s a pretty tough task. If this is a milder recession than recent history, I think that’s still in the cards.

The Federal Open Market Committee, the decision-making arm of the central bank, holds eight regular meetings a year. Over the course of two days, the 12-member group reviews economic data, assesses financial conditions and assesses monetary policy actions that are announced to the public following the conclusion of its meeting on the second day, as well as a moderated press conference by President Powell.

Below are the meetings tentatively scheduled for 2023. Those with asterisks indicate the meeting along with a summary of economic projections, which includes the chart colloquially known as the “dot chart” that shows where each Fed member s expect interest rates to land in the future.