On February 1st, the Federal Reserve decided to raise interest rates for the eighth time. They also mentioned it could be another two increases happening down the line, but also agreed that inflation started to wane.
This was the first increase for and meeting for 2023 and it came with an increase of 0.25%. A year ago the rate was almost zero and now it’s between a range between 4.5% and 4.75%.
This is also showing that the Fed isn’t raising rates anymore at such a drastic rate as it did in 2022, as a way to combat inflation. It seems that the preferred inflation index was at 5% back at the end of 2022 when it was almost 7% a few months back in June.
The current chair of the Fed, Jerome Powell, mentioned “some more” increases to the rate are being discussed, to ensure that inflation gets back to a sense of normalcy.
Mr. Powell goes on to say that “it’s working and inflation is headed in the opposite direction, yet at the same time we’ll continue as is needed to get inflation down where it needs to be.”
The markets and Wall Street felt that post-March the rates may stop going up, which helped the overall markets that day. They also felt that it would stop after only one additional rate hike. There’s even some discussion that by the end of the year, interest rates would start to drop, which pushed the markets high for the new year.
There is a sense of positivity that the markets are showing, versus what the Fed is actually saying. Many have already assumed that the actions of the Fed will provide positive results, yet the Fed themselves are being much more cautious.
While the Fed is seeing all the right signs and data points, there are some in the central bank that feels that the inflation felt today will be hard-pressed to go down completely, meaning that the rate increases need to continue to combat the inflation issues.
Senior Economics from MacroPolicy Perspectives, Laura Rosner-Warburton added. “This is the next stage of the plan from the Fed. It’s about going on the offensive now.”
Even with the sentiment on Wall Street, those that represent the Central Banks have already felt back in December that the interest rates would go just north of 5% through 2023, and keep it there. This is meant to make funds more expensive to borrow and thus slow down demand and economic growth to curb inflation.
While Mr. Powell was still stating there are no concrete decisions yet, there are officials that are still repeating that rates will most likely continue to go up. Mr. Powell himself would still lean in his wording that the rates would still most likely cross over the 5% threshold though.
He added, “Just a couple of rate hikes will get us to where we need to be.” He didn’t feel that the interest rates would go down this year, with the expected outlook of the economy for the year.
He continued to state that “he was unsure” when it came to stopping interest rate hikes and said also “we can make it more,” concerned about inflation creeping back up unexpectedly.
“We will continue to do our job,” he stated.
The labor market seems to be doing well, as openings increased in December and there are almost 2 positions available for every person who isn’t currently employed.
“The market for labor seems palatable but could be improved upon.” Mr. Powell mentioned on February 1st as well.
Typically what happens is that the average consumer would be using their savings, thus slowing their spending, but the growth in wages has enabled inflation to remain.
Sara House, who is a senior economist for Wells Fargo said, “While inflation looks to be heading in the right direction, it seems the Fed cannot simply close out the topic and say we’ve beat it.”
Throughout the rest of the world, economies haven’t gotten as weak as expected. China has slowly started to reopen and the winter hasn’t been so bad in energy-expensive locations throughout Europe. The Fed also confirmed that the growth globally seems to be in a better direction this year, yet still mentioned Ukraine and its war were still having dire effects and that it’s “continuing to cause a level of uncertainty through every economy.”
Either way it appears a soft landing for the Fed is possible. This is where the economy avoids a steep fall, while at the same time, inflation slowly continues its decline. Yet if the economic growth, domestically and globally keeps going strong, then it may not happen.
The Fed is now looking at the direction the economy is going and is working to estimate how much it has to go down, with how much to increase the rates.
The effects of the actions of the Fed will be felt by all Americans, as it is a key factor in how unemployment will move.
Bill English, who is a former director of the monetary affairs division for the Fed, stated that “recession is still a big possibility, and we’re on the edge of it based on many factors.”
Chief US and Canadian Economist for S&P Global Ratings, Beth Ann Bovino felt that “they are working on that soft landing as much as possible.” but was quick to add “the effects of their increases aren’t always seen immediately.”
Those in the Central Bank, based on their latest data, feel that unemployment will cross over 4% by end of 2023, nearly a percent of what it is now at around 3.5%.
Mr. Powell still feels that it will be possible to decrease inflation and protect the economy from a recession, but their priorities nonetheless are all about managing the increase in pricing, over issues with economic growth or healthy labor markets.
“The goal comes first,” he mentioned. “And we have a job to do”
