s the US economy moves into the new year, the Federal Reserve is shedding more light on its concerns about strong inflation lingering in the economy. After the Dec. 13-14 meeting of the Federal Open Market Committee (FOMC), policymakers published new projections showing that they expect inflation to end in 2023 higher than previously thought. This has led to widespread support for the idea that interest rates may need to rise above 5% in 2023. The minutes from this meeting will be published on Wednesday at 2 p.m. in Washington.
Why Is the Fed Worried about Inflation?
According to the median projection of FOMC members, inflation is expected to end 2023 at 3.1%, compared to the 2.8% forecast in the previous quarterly projection released in September. This outlook is at odds with that of Wall Street, which has generally become more optimistic in recent months as price pressures have started to moderate. In his post-meeting press conference, Fed Chair Jerome Powell linked the central bank's inflation pessimism to ongoing strength in the labour market, specifically citing services prices.
What Does This Mean for Interest Rates?
The FOMC signalled the possibility of interest rates rising above 5% in 2023. The Fed began raising its benchmark interest rate from nearly zero in March, which was criticized by some as a late start to the tightening cycle. The central bank then increased the rate faster for much of the year, bringing the federal funds rate to its current level of 4.3%, the highest since 2007. At the December meeting, the FOMC opted for a half-point rate hike following four three-quarter-point moves. However, the committee also signalled the possibility of another 75 basis points worth of increases this year, which was more than what Fed watchers had expected, given the lower inflation readings in recent months.
Why Is This Important for Financial Markets?
Investors now expect the Fed to return to normal-sized quarter-point rate hikes at its next policy meeting on Jan. 31-Feb. 1. According to futures contracts, investors see the federal funds rate peaking just below 5% around mid-year. The outlook for interest rates "was pretty hawkish," and "much more than the market was pricing in," according to Priya Misra, global head of interest rate strategy at TD Securities Inc. in New York. Misra noted that she will be looking for signs in the minutes that the FOMC has shifted its stance on the trade-offs between inflation and employment, with the key question being "how much of a rise in unemployment can they tolerate?"
In conclusion, the minutes from the Fed's December meeting are expected to provide more insight into the central bank's concerns about strong inflation lingering in the US economy and the possibility of interest rate hikes in the coming year. Financial markets will closely watch these developments as they may have significant economic and monetary policy implications.
‍
‍
‍
More fromÂ
US
 category
