WASHINGTON, Dec 2 (Reuters) – New forecasts from the U.S. Federal Reserve, along with a half-point interest rate hike expected later this month, could suggest the central bank’s target rate is heading toward levels last seen before the 2007 financial crisis. it will also provide policymakers’ best estimates yet of the implications for a sustainable labor market.
A stronger-than-expected U.S. jobs report for November showed firms added 263,000 workers, hourly wages rose 5.1% year-over-year and the size of the labor force shrank — signs that the overall job market is moving both tight and fast. The Fed hopes it will start to cool.
Along with the only modest decline in inflation so far, new forecasts from the Fed’s 19 policymakers show rates will continue to rise and remain high through 2023, defying current market expectations for rate cuts until the end of next year.
“The Fed has been telling us that rising unemployment and lower wage growth will take longer-term restrictive policy, and today’s data provides more evidence of that,” Jefferies economist Thomas Simons said. “This does not put the Fed off track for a widely expected 50 (basis point) rate hike at its upcoming meeting, adding more confidence to our expectation that the policy rate will exceed 5% next year.”
The last time interest rates exceeded 5% was from June 2006 to July 2007, at the start of the 2007-2009 financial crisis and recession, when the federal funds rate was around 5.25%.
The updated forecasts, released after the Federal Open Market Committee’s Dec. 13-14 meeting, will be another chance for officials to show how they expect the “raise and hold” strategy to play out in terms of the final level of the policy rate. , and the progression of growth, inflation and especially unemployment.
The meeting will cap a volatile year that has seen the central bank respond to the fastest inflation since the 1980s and the fastest rise in interest rates since then. The aggressive response shocked the financial system, at one point wiping out about $12 trillion in US stock market value and recently slashed home mortgage rates to 7% for a population accustomed to cheap money.
Stocks have rallied recently and this week when Fed Chairman Jerome Powell said he was ready to slow down from four consecutive three quarters of rate hikes in favor of the Fed, possibly in his last remarks before the meeting. an expected half-point increase.
It was a potentially unfavorable outcome for the Fed chairman, who wants to keep monetary conditions tight and focus public expectations on fighting inflation.
But Powell was also open about the exchange. Even if the central bank starts to move in half-point or quarter-point increments in the coming months, the policy rate is still rising toward an unspecified “appropriately restrictive” stopping point, and officials intend to leave it “there” for some time. “
Fed officials from San Francisco Fed President Mary Daly to St. Louis Fed President James Bullard, often on opposite sides of recent policy discussions, have both discussed interest rates that could rise above 5% next year.
INFLATION ‘TOO HIGH’
In a lengthy talk at the Brookings Institution this week, Powell described what could be a long transition for the United States to a world with only slowly falling inflation, high interest rates and potentially chronic labor shortages.
To slow price increases, it is clear that energy needs to be drained from a labor market in which the demand for workers lags far behind the number of people willing to work – an imbalance created in US demographics and immigration policy, and exacerbated by the pandemic.
Included in the new Summary of Economic Projections will be estimates of how big a toll Fed officials feel will be in terms of rising unemployment and slower growth as policy begins to bite.
Powell said he still sees a “reasonable” path to a “soft” downturn with modest job losses.
However, the regulation is still not going fast.
Data released Thursday showed the Fed’s preferred measure of inflation was 6% in October, down from September’s 6.3% and the lowest this year, but still three times the Fed’s 2% target.
Employment data released on Friday showed little evidence of change there either.
The economy has added an average of 392,000 jobs per month this year. While the pace slowed to 277,000 in August-November, that’s still more than the 183,000 added monthly in the decade before the pandemic.
THE PROJECTIONS ARE BETTER THAN THOUGHT
Fed forecasts raced throughout the year to catch up with reality. As of last December, officials had forecast the policy rate to end 2022 at just 0.9%, while the preferred measure of inflation would fall to 2.6%. The top individual fed funds forecast was only 1.1%.
It quadrupled: With a half-point increase expected at the next meeting, the policy rate will end the year in a range of 4.25% to 4.5%.
Powell acknowledged this week the difficulty of forecasting in an environment still troubled by the pandemic and its aftermath.
But there is also little choice as the central bank stops “front-loading” interest rate hikes with bigger rate hikes and begins to “feel” its way to a stop, as Powell described it.
As of September, the Fed’s narrative still has the favorable outcome of continued growth, steady progress on inflation and the unemployment rate rising by less than a percentage point to 4.4% by the end of next year from the current 3.7%. referred to as “perfect disinflation” which costs little to the real economy.
The Fed funds rate was seen at 4.6% through 2023.
That should be “slightly higher,” Powell said, and November’s jobs data could push it up another notch. The upcoming forecasts will show that the end destination is perhaps in sight and will give a better estimate of whether the job market can withstand it.
Jason Furman, former chairman of the White House Council of Economic Advisers, tweeted that average earnings data for November and revisions to prior months were “adjusted for about 5% inflation.” “I allowed myself to hope more for a soft landing, but that hope was completely dashed.”
Reporting by Howard Schneider; Edited by Dan Burns and Andrea Ricci
Our standards: Thomson Reuters Trust Principles.