The Federal Reserve continues to hike interest rates in response to high inflation, but internally it may not be confident about its long-term projections for its actions.
- The Federal Reserve hiked interest rates seven consecutive times in 2022, pushing the rate to 4% to 4.25%, and it is expected to get higher. The Fed has promised a bullish response until inflation is under control, possibly rising above 5%.
- Projections continue to grow more gloomy as the Fed raises its forecasts for inflation rates by the end of 2023. Projections rose from 2.8%, as predicted in September, to 3.1%, Bloomberg reports.
- The Fed released its last interest rate hike on December 14, raising it by 50 basis points. Details from the December 13-14 Federal Open Market Committee were released on Wednesday, showing that it remains determined to reach its goal of 2% inflation but that inflation will not cool fast enough to avoid needing more hikes.
- The Bureau of Labor Statistics will release its updated Consumer Price Index for the month of December on January 12, which may show the direction of inflation post-hikes.
- Inflation peaked year-to-year in June at 9.1% before reducing to 7.1% in November.
Why it’s Important
The Fed lowered interest rates to almost zero during the COVID pandemic to help stimulate the economy. Its actions in the past year reflect some of its most aggressive maneuverings since the 1980s. It also represents a threat to near-term economic stability, with Fed Chair Jerome Powell openly acknowledging that he is risking high unemployment and deliberately slowing economic growth in order to stop inflation from becoming entrenched.
“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability,” says the minutes of the Federal Open Market Committee.
The overall economic outlook is already negative, with analysts predicting that the U.S. is already in the early stages of a recession. Unemployment is expected to rise from 3.7% in November to 4.6% by the end of 2023. While early indicators suggest that unemployment may continue to stay low into 2023 and that inflation may be responsive to the interest rates, high government spending and economic stressors may downplay early indicators.
“The most recent reading on price pressures published by the Commerce Department on December 23, which showed so-called core inflation—excluding food and energy—rose just 0.2% in November. That was less than what was implied by the Fed’s latest projections, and monthly readings of a similar size going forward would be consistent with a return to the central bank’s 2% target,” says Yahoo Finance.