See Fed 2023: When rate hikes will slow

Minneapolis
CNN
—

America’s central bank has been in the spotlight for much of the past year as Federal Reserve Chairman Jerome Powell has used the blunt tools of raising interest rates and quantitative easing to curb rising inflation.

Inflation rates as 2022 draws to a close show some are working: Consumer prices are cooling, home sales have stalled, and some of America’s best-known companies are planning to slow turnover and pull back capital investment.

The latest measure of inflation showed that the November Consumer Price Index was 7.1%, down from a 40-year high of 9.1% in June; prices for used cars, lumber, and gas—once the poster children for painfully steep price increases—have fallen; and housing prices and rents have also been on a downward trajectory.

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

In a few weeks, the Fed’s Act II kicks in.

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

While the Fed has — finally — won some small victories in slowing the economy, after seven bumper rate hikes, a tight and historically tight labor market remains a thorn in the central bank’s side. When the number of available jobs outstrips job seekers, wages can rise, which in turn can keep prices higher for longer.

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

There are already signs that the labor market is softening: Quitting and hiring are down, while layoffs are up; pending claims rose to highest level since February; and the number of jobs added each month slowly began to decline.

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

So employers are hesitant to lay off people, and other areas of the economy are showing so much strength that the unemployed can quickly be rehired. Mayfield said.

“This latent strength in the labor market could lead to excessive Fed tightening,” CNN reported. “The rest of the economy, for us, is a very clear signal of a slowdown, an imminent recession. Seeing as the Fed revises its unemployment forecasts, lowers GDP growth, it appears they agree.”

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

The December forecasts pointed to a more aggressive monetary policy tightening path with the median forecast. In September, the interest rate rises to a new peak of 5%-5.25%, from 4.5%-4.75%. That would mean 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.

Policymakers also predicted PCE inflation, the Fed’s favored price gauge, would remain flat. It will exceed its 2% target by at least 2025. Further projections undermined expectations about the health of the US economy, with Fed officials now projecting unemployment to rise to 4.6% by the end of 2023 and remain at that level through 2024. This is 0.2 percentage points higher than the 4.4% rate they expected in September and significantly higher than the current rate of 3.7%.

According to forecasts by Fed officials and others Economists say the path has narrowed for a desired “soft landing” to tame inflation while avoiding a recession or significant layoffs.

“It’s been pretty impressive how well the consumer has held up over the last 18 months, and not pulling the rug out from under the consumer depends a lot on how you get to the soft landing,” Mayfield said.

“I think it’s a really, really narrow path and the tone of the Fed [during its December meeting] Doesn’t give me much optimism that they can pull this off without going into recession. … If a soft landing avoids a recession altogether, I think that’s a pretty tough job. If it’s a milder recession than recent history, I think it’s still on the cards.”

The Federal Open Market Committee, the central bank’s policy arm, holds eight regularly scheduled meetings a year. Over the course of two days, the 12-member group reviews economic data, assesses the financial situation, and evaluates the monetary policy measures announced to the public at the conclusion of the second day’s meeting, and holds a press conference led by the chairman. Powell.

Below are the meetings tentatively scheduled for 2023. Those with an asterisk indicate a meeting with the Summary of Economic Projections, which includes a chart known as a “dot plot” showing where each Fed member expects interest rates to fall in the future.

— CNN’s Nicole Goodkind contributed to this report.