0.5% Fed funds raise. Slowing rises in future but they are making slower progress on inflation than expected so they expect to make rates more restrictive and keep them for an extended time.
Inflation risk to the upside although the Fed is encouraged by the gradually decreasing CPI. Increasing inflation risk is driven by non-housing services sector (increased wages) since goods and housing inflation expected to slow rapidly in 2023.
Current projection fed funds dot plot 2023 currently 5%, but the Fed has raised the end point of raising the fed funds rate every meeting this year so there’s no saying where they will take it at future meetings, could be higher.
Expect real GDP growth of only 0.5% in 2023. (Nobody mentioned “stagflation.”)
Forget about rate cuts in 2023 even though market has priced some in.
“Ongoing increases in the target range will be appropriate’ sounds unambiguous to me. On a positive note my brokerage money market is now paying 4 percent, my fdic insured savings is paying nearly 2 percent, and my resolve this remain overweight cash is strengthened.
Perhaps the reduced rate increase is an acknowledgement of that fact. I am sure if they had raised the rate .75 again there would be screaming that Powell is overshooting the rate increase. .5 is a decent increase and he and others on the board will watch and wait.
I think there is still a possibility that they pause after March, but they might do one more hike of 25bps in May. But remember, there are many CPI numbers (and other numbers they look at) that will be released between now and then - Dec, Jan, Feb, Mar, and advance April CPI numbers (only fed can see those) come out before the meeting on May 2-3.
So looks like 25bps in Feb, 25bps in Mar brings us to 4.75-5.00, and the upper range of that is pretty close to the predicted terminal rate of 5.1. If we see the predicted terminal rate rise to 5.25, then it’ll be likely that we see another 25bps in May.
If you watched market reaction on CNBC, its clear that many were optimistic that he might not do the anticipated 0.5% increase. And sold immediately when he announced it. Market then recovered while he spoke but then dipped again by the close. Call that volatility.
He was emphatic that 2% inflation is the goal and refused to consider any change in that goal. We still have full employment and he is not concerned about unemployment at this time. He seems satisfied with lower prices of materials but the labor component is still a concern. He mentioned 4 mm shortage of manpower and noted that part was loss of 1 mm lives to Covid and those who took early retirement due to Covid. He hopes economics will cause many to return to the work force. He sees need for more immigration but deferred to Congress.
Asked about the wealth divide, he noted that the economy from 2018-20 put many people to work and people in the lowest income brackets saw the largest income increases. He hopes to return to that environment at 2% inflation and should result in more gap reductions in a healthy economy.
If the reduction in inflation was about 0.5% this month, time required to reach 2% from current 7.2% is about 10 months.
@pauleckler - Thanks for the summary and your thoughts re: reducing inflation. My thought is that inflation reduction may not be that linear. Could it be that inflation will get knocked down at a higher rate than 0.5% going into 2023 as people start to feel the pinch of higher prices and reduce spending?
'38Packard ==> I guess we’ll just have to wait and see