The Fed’s 2023 Map Is Not the Territory

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The Federal Reserve plotted a course for next year that includes sluggish growth, declining yet persistently high inflation, and at least a few more interest rate hikes.

It’s a good idea to study this Fed map closely, but it is also prudent to remember that the map is not the territory.

The Fed raised its benchmark interest rate by a half a percentage point on Wednesday to a range of 4.25 percent to 4.5 percent. This was exactly what the market expected after a month or so of Fed officials coming very close to explicitly promising that, after four 75-basis point hikes, they were ready to slow down the pace.

The Fed also released a new set of projections of Fed policymakers showing that they expect to keep raising rates in the new year. The median expectation for the Fed’s benchmark federal-funds rate at the end of next year is 5.1 percent, which translates into a range of five to 5.25 percent. That would mean something like three more 25-basis point hikes or another 50-basis point hike followed by a single 25-basis point hike. That was slightly higher than at least some Fed watchers had expected.

The market has doubts about this forecast. The CME Group Fedwatch tool, which translates prices of federal-funds futures into predictions about rates, currently has just a two percent chance of the Fed’s target being above five percent at the December meeting. There’s a greater than 50 percent chance that the target will be exactly where it is now or lower. In fact, the futures currently imply higher odds that the Fed’s target will be above five percent in March than the end of the year.

This is widely interpreted as a prediction that the Fed will wind up cutting rates sometime next year. The exact reasons for such a cut remain in dispute. A sizable contingent on Wall Street thinks that the Fed’s hikes will push the economy into a recession severe enough that the Fed will be forced to back off of its hawkish stance, regardless of whether it has reached its goal of putting inflation on a credible path back down to two percent. A smaller group thinks inflation will come down enough at some point next year that the Fed will be able to declare mission accomplished and back off from the rate hikes.

These views are all the more remarkable because Fed Chair Jerome Powell has insisted that there is almost no chance any of these scenarios will occur. In his view, the Fed will not suddenly switch from hiking to cutting, even if inflation appears to be in retreat or the economy is in a recession. This would risk reigniting inflation and perhaps entrenching it. Indeed, the projections of Fed officials come close to being a prediction that the Fed will hike even though growth falls close to zero and unemployment jumps a full percentage point higher—outcomes consistent with a recession.

Federal Reserve Board Chairman Jerome Powell at a news conference in Washington, DC, on November 2, 2022. (MANDEL NGAN/AFP via Getty Images)

Of course, the Fed has been wrong before. At the December meeting of 2021, for example, the median projection for the federal-funds rate at the end of this year was 0.9 percent. That was actually an increase from the September projection of 0.3 percent, which would have meant just a single 25-basis point hike this year. The Fed was also projecting last December that the economy would grow four percent this year. Now it looks like we’ll be lucky to eke out a 0.5 percent growth rate. It also saw inflation falling down to 2.6 percent—about three points lower than where we’re likely to end up.

The market appears to have concluded that the Fed is getting things wrong once again, albeit in the opposite direction. If the Fed was too dovish at the end of last year, perhaps it is too hawkish at the end of this year. It’s worth keeping in mind, however, that market indicators and Wall Street forecasts of inflation and growth at the end of last year were just as inaccurate at those emanating from the Fed.

We’ll close with a forecast of our own: This will be the last Breitbart Business Digest of the year. We will return in 2023. Until then, we wish you a Merry Christmas and a joyous New Year.

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