Topline
The Federal Reserve on Wednesday set the stage for additional interest rate hikes in the coming months and revealed officials still aren’t convinced any rate cuts will be necessary this year—dashing hopes the central bank would pivot from the aggressive policy that has rattled investors, tanked the housing market and ushered in telltale signs of a looming recession.
Federal Reserve Board Chairman Jerome Powell testifies during a hearing before the Senate Banking, … [+]
Key Facts
According to a summary released Wednesday, Fed officials at their latest meeting in December deemed additional interest rate hikes in the coming months would be “appropriate” to help slow inflation, and none of them anticipated it would be appropriate to cut rates this year—challenging some expectations the central bank will do so to stimulate growth.
Officials “welcomed” the slower pace of inflation in October and November, but they stressed it would take “substantially more evidence of progress” to be confident inflation is on a “sustained” path down.
The announcement comes after Minneapolis Fed President Neal Kashkari in a Wednesday post lamented the rapid inflation that hit a 41-year high of 9.1% in June and similarly warned, “it is too soon to definitely declare” inflation has peaked despite mounting evidence that it may have.
Citing the prolonged inflation that plagued the 1970s, during which the Fed cut rates prematurely only to have inflation flare back up again, Kashkari, who will vote on the Fed’s interest rate decisions this year, cautioned it would be a “costly error” to prematurely cut rates again, saying the move should only be taken once officials are convinced “we have truly defeated inflation.”
Stocks fell immediately after the Fed’s meeting minutes were released, with the Dow Jones Industrial average erasing a nearly 300-point gain and trading flat by 2:25 p.m. ET.
Key Background
The Fed’s interest rate hikes—and central bank tightening around the world—have triggered steep downturns in the housing and stock markets, and a growing number of experts worry the turmoil could ultimately spark a deep global recession. According to British investment firm Schroders, a rate hike can take up to two years to fully ripple across the economy. Nevertheless, policymakers have largely remained steadfast in their commitment to fight inflation, which remains nearly four times the Fed’s historical 2% target. After their last meeting, officials said ongoing increases “will be appropriate” in order to help bring inflation down to the Fed’s target level.
What To Watch For
The Fed’s next interest rate announcement is slated for February 1. Bond investors expect a top rate of 4.94%, but economists at Goldman Sachs expect the Fed will deliver quarter-point hikes at their next three meetings—holding top interest rates at 5.25%, the highest level since 2007, for the rest of the year. Incoming inflation data, however, could lower—or raise—these forecasts.
Tangent
Amid growing recession fears, yields on 10-year Treasurys have fallen as much as 80 basis points below those on two-year Treasurys—marking the steepest yield curve inversion since the 1980s. A Fed study in 2018 found every recession in the past 60 years has been preceded by a yield curve inversion.
Further Reading
What To Know About The Yield Curve—And Why It May Predict A Recession (Forbes)
Fed Raises Rates Another 50 Basis Points (Forbes)
Fed Chair Jerome Powell—Haunted By The Ghost Of Paul Volcker—Could Tank The Economy (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2023/01/04/fed-expects-no-interest-rate-cuts-in-2023-one-official-warns-of-costly-error-if-central-bank-backs-down-too-soon/