As the Fed plans to “raise and hold,” new forecasts could show Health & Fitness Journal costs

©Health & Fitness Journal. FILE PHOTO: An eagle crowns the facade of the Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo

By Howard Schneider

WASHINGTON (Health & Fitness Journal) – Federal Reserve officials signaled plans for a half-point rate hike at this month’s meeting, and while that would be a step down from recent rate hikes, new forecasts released at the time may suggest one Policy rates are pointing towards levels last observed on the eve of the 2007 financial crisis.

In addition, the new forecasts from the 19 US Federal Reserve Bankers, in an outlook that could align with market expectations for rate cuts through the end of next year, could well show that the Federal Funds Rate will remain at these high levels at least until 2023.

The updated outlook will be a fresh opportunity for Fed officials to show how their “raise and hold” strategy is likely to play out in relation to the ultimate level of the federal funds rate and the progression of growth, inflation and unemployment. Hope is a resilient one Business.

The rate-setting Federal Open Market Committee meets Dec. 13-14, capping a volatile year in which the central bank responded to the fastest burst of inflation since the 1980s with the fastest rise in interest rates since to try to offset it. This aggressive response shocked the financial system, wiping out nearly $12 trillion in US stock market value at one stage and more recently pushing home mortgage rates down to 7% for a population used to cheap money.

Graphic: 2022 US stock market decline

Stock markets have been rising of late, soaring this week as Fed Chair Jerome Powell, in what will likely be his last public statement before the meeting, said the Fed was poised to pull off a series of four straight three-quarter-point rate hikes slowing down – a potentially uncomfortable outcome for a Fed chair who wants to keep financial conditions tight and public expectations firmly pinned on the fight against inflation.

But Powell was also outspoken about the compromise. Even if the central bank starts moving in half- or quarter-point increments, the policy rate is headed toward an as-yet-undefined “appropriately restrictive” breakpoint, and officials intend to leave it there “for some time.”

Fed officials from San Francisco Fed Chair Mary Daly to St. Louis Fed Chair James Bullard, who have often been on opposite ends of recent policy debates, have both spoken about interest rates that may exceed next year could increase by 5%. The last time the Fed’s interest rate rose above this point was from June 2006 to July 2007, at the start of the 2007-09 financial crisis and recession, when the federal funds rate peaked at 5.25%.

If there are concerns about breaching that limit, Fed officials have not voiced it. John Williams, chairman of the New York Fed and vice chairman of the FOMC, said recently that he expects interest rates to remain “tightening” “at least until next year”.

INFLATION ‘MUCH TOO HIGH’

In a lengthy interview at the Brookings Institution this week, Powell outlined what may indeed be a protracted transition for the Fed and the US economy into a world of slow declining inflation, high interest rates and potentially chronic labor shortages.

To slow the pace of price increases, it is clear that energy must be withdrawn from a labor market where the demand for labor far exceeds the number of people willing to take a job – an imbalance evident in US demographics – and immigration policy, and amplified by the pandemic.

Graphic: Unemployed to job offers

Embedded in the new roundup of economic forecasts will be estimates of what the toll Fed officials will be paying in the form of rising unemployment and slower growth as their policies start to bite.

Data released Thursday showed the Fed’s preferred measure of inflation was 6% in October, down from September’s 6.3% rate and the lowest this year but still triple the Fed’s target of 2 %.

“It will take a lot more evidence to reassure that inflation is indeed declining. By any measure, inflation remains way too high,” Powell said.

Friday’s jobs data will estimate wage growth for November, another key piece of information for policymakers who believe prices are unlikely to fall until job and wage growth slows.

The economy has created an average of 407,000 jobs per month this year. Although the August-October pace slowed below 290,000 and analysts expect November’s figure to be just 200,000 new jobs, it’s still above the 183,000 added monthly in the decade leading up to the pandemic.

Graphic: interest rates and inflation

PROJECTIONS MUCH MUCH CONFUSED

Fed forecasts have raced through the year to keep up with reality. Last December, officials’ median forecast was that their policy rate would end at just 0.9% in 2022, with the preferred measure of inflation falling to 2.6% – an implied bet that inflation would subside partly on its own. The highest forecast for individual Fed funds was just 1.1%.

They were off by a factor of four. With an expected half-point hike at the next meeting, the key interest rate will end the year in a range between 4.25% and 4.5%.

Graphic: Federal Reserve target interest rate

Powell this week acknowledged the difficulty of making forecasts in an environment still reeling from the pandemic and its aftermath.

But there’s no choice, either, as the central bank ends its headlong attempt to bring forward rate hikes to tighten lending and credit conditions — the mechanism the Fed uses to try to change the course of the economy — and begins, as Powell did described in order to “feel” the way to a stopping point.

In September, the Fed’s narrative still contained a benign outcome of sustained growth, steady inflationary gains and an unemployment rate that rose less than a percentage point from 3.7% currently to 4.4% by the end of next year — what some have described as “pristine “disinflation” which causes little cost to the real economy.

The fed funds rate was 4.6% at the end of 2023.

It’s going to have to be, Powell said, “a bit higher.” The coming forecasts will show that the final destination may be in sight and will also give a better estimate of the possible costs.