US Federal Reserve predicts another year of interest rate hikes for 2023

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Canadian borrowers who had hoped the U.S. central bank would signal that rate hikes were over were once again disappointed after Federal Reserve Chairman Jerome Powell not only hiked rates half a point to hit a 15-year high, but promised further increases in the new year.

Much like in Canada last week, some optimists were hoping for a recent lower inflation in the United States would mean that a quarter-point rate hike was all that was needed, followed by a pause.

But, while glad it was less than the previous four three-quarters percent hikes, the vast majority of economists have resigned themselves to the half-point increase.

“Let’s say again for the record that we think this bull cycle should be over right now,” wrote Tom Porcelli, chief U.S. economist at RBC Capital Markets in a research note ahead of Powell’s speech. “We’ve loved saying for the past few months that the Fed was waging yesterday’s war on inflation.”

But that is not how Powell and his advisers see it. The Fed Chairman warned that even the current rate, which remains below the 7.1% inflation rate, would not be enough to suppress the growth of prices and wages.

Even higher prices

Not only did the bank raise rates to a range of 4.25% to 4.5% in this final policy decision of the year, but Powell insisted there could be several more rate hikes to come. interest over the coming year to remove what he called “the difficulties that cause inflation and bring prices back to stable.

“We continue to anticipate that the ongoing increases will be appropriate to achieve monetary policy tight enough to bring inflation down to 2% over time,” Powell told reporters at a Wednesday afternoon news conference.

American workers remain in high demand and Fed Chairman Jerome Powell has said a shortage of workers will keep the economy from sliding into decline.
A rental sign is displayed on the window of a Chipolte restaurant in New York on April 29, 2022. (Shannon Stapleton/Reuters)

In fact, of the 19 Federal Reserve officials on the Monetary Policy Committee, 17 have offered independent estimates that the Fed’s target interest rates will exceed 5% in 2023.

But the rates borrowers would have to pay would be much higher. Such a move next year would take US prime rates, the cost of interest offered to a commercial bank’s best customers, to well above seven percent.

And even if these are US rates, it is rare for the Bank of Canada to deviate too much from the levels of the Fed. In addition, Canadian borrowers may be affected when their banks have to hedge the risks of long-term loans in the US bond market.

Delicate situation

During Wednesday’s press conference, Powell persisted in the idea that the United States could escape recession and that he would not discuss the risk of stagflation, on the grounds that he would not address the “hypothetical “.

Stagflation is the phenomenon where inflation persists even as the economy collapses.

But while Powell hopes to avoid a sharp downturn, most economists polled by financial publications are skeptical, with a large majority saying a recession remains inevitable.

Those who bought real estate taking advantage of low interest rates are seeing their borrowing costs rise as the central bank tries to rein in inflation. (Don Pittis/CBC)

Powell and Bank of Canada Governor Tiff Macklem insist there will be no bend in their path to low inflation.

“Our top priority is to get inflation back to the 2% target,” Macklem said in a speech Tuesday. But according to some economists, Powell and Macklem could be in trouble, in two ways.

Besides the conventional meaning of clunky or tricky, economists use the term “sticky” to refer to any financial variable that resists rapid change. Like wages and house prices, once people get used to current increases in the price level, inflation may resist change, in part because everyone wants to catch up.

2 percent or broken

Central bankers have “fallen behind an inflation process that is likely to prove more rigid than many currently expect.” writes economist Mohamed El-Erian earlier this week. He preferred to raise rates sooner.

Although recent inflation figures have declined from their highs in the United States and Canada, much of this decline has been seen in commodities, including gasoline.

Partly driven by rising prices for services, the Fed’s preferred measure of inflation, known as core inflation – which eliminates volatile prices like gasoline, has remained stubbornly high at 6%, three times the inflation target level.

WATCH | Journalists discuss Tiff Macklem’s year-end press conference:

Peter Armstrong and Heather Scoffield at the Bank of Canada Governor’s Year-End Press Conference

CBC Senior Trade Correspondent Peter Armstrong and Toronto Star Ottawa Bureau Chief Heather Scoffield speak at Bank of Canada Governor Tiff Macklem’s last press conference in 2022.

“There are reasons, just for services, to be concerned that inflation will continue to beat the Fed’s forecast which has already been consistently revised upwards,” El-Erian wrote.

The economist fears that hitting the 2% target will cause more damage to the economy than the bank would be willing to accept. Although it doesn’t say so publicly, El-Erian thinks the Fed knows it will have to settle for a higher target level, closer to, say, 4%.

No painless option

Asked directly about this option, Powell was adamant.

“We are not considering that and we are not going to be considering it at all,” he told reporters. “We will maintain our inflation target at 2%. We will use our tools to bring inflation down to 2%.

As Canadian homeowners and borrowers know, big interest rate hikes hurt. Asked by a reporter about the pain a Fed rate hike above 5% would cause, including in lost jobs, Powell insisted the pain of inflation was worse.

He said it would be even worse if, as in the 1970s, inflation expectations became so entrenched that the only solution was a deep recession and a long period of job losses.

He said continuing interest rate hikes next year would hurt, but far less than stopping rate hikes too soon.

“I wish there was a completely painless way to restore price stability,” Powell said. “There are not any.”


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