More gradual but longer compression. The Federal Open Market Committee (FOMC), the Federal Reserve body responsible for US monetary policy, announced a 50 basis point rate hike to 4.25-4.5%, the highest level in 15 years. This is the seventh consecutive interest rate hike. Prior to this year, the Fed had not raised interest rates at the end of the meeting by more than 25 basis points in 22 years. In 2022, it did that five times, with four upsides of 75 basis points and that’s one of the 50 points that is a slowdown, but it’s the beginning of a new phase, one that has pressures that last longer than expected so far, and higher end rate.
The “dots,” individual governors’ predictions about the future direction of interest rates, appear to be in line with what Federal Reserve Chairman Jerome Powell predicted. The median forecast is for the fed funds rate of 5-5.25% by the end of ’23, 75 basis points above the current level, versus the 4.5-4.75% announced in September. By the end of 2024, the median would have been 4-4.25%, against the previous 3.75-4%, and by the end of 25 it would be 3-3.25% from the previous 2.75-3%. The long-term rate, which is inevitably a rough and imprecise measure of the neutral rate, remained unchanged at 2.5%, and in ’25 rates will remain at a higher level.
The president also stressed at a press conference that now “it is much more important to assess the final level of rates, and then, at a certain point, the question will become how long we will stay with the restrictive orientation.” Powell also emphasized that indicators for future rates could also be corrected upwards in 2023, if necessary: Conservatives believe risks to inflation remain directed upwards. Monetary policy will continue to be implemented “meeting by meeting”, based on the “total” of available macroeconomic data.
The macroeconomic outlook justifies longer pressures and a higher terminal rate: compared to September and taking into account the new indicators of the cost of credit, they point to a slight rise in inflation and decidedly slower growth, at least in the short term. Prices could rise 3.1% next year (from 2.8%), 2.5% in 2024 (from 2.3%), and 2.1% in 2025 (from 2%). Recent declines in inflation are inconclusive: “More evidence will be needed to say with confidence that inflation is on a sustainable downward trajectory,” Powell said at a news conference. The outlook, however, is judged to be “well established” by the Fed.
Growth will be affected by this prolonged pressure: 0.5% next year, down sharply from the 1.2% indicated in September; 1.6% in 24, up from 1.7%; and 1.8% (unchanged) in 2025, a level coinciding with long-term growth, meaning the implied monetary policy target. So the Fed appreciates – and obviously hopes – a short-term slowdown in the economy that could calm prices and a relatively quick return to equilibrium. However, the most pessimistic of the rulers’ indicators do not rule out a recession next year: -0.5% (it was -0.3% in September) the least favorable forecast. “I don’t think anyone knows whether or not we’re going to have a recession — though, except that a soft landing is now out of reach — and if anyone knows whether it’s going to be a deep one, Powell said, it’s unknown.”
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