The US economy has remained surprisingly resilient against the most aggressive hawkish Federal Reserve in 40 years. This could be a cause for concern for US central bank officials.
The latest economic data released in the first two months of 2023 are beginning to suggest that demand and inflation may not be slowing as previously thought. Fed officials, including Chairman Jerome Powell, have warned that interest rates are likely to rise further than previously expected and remain so for longer.
“January data on employment, consumer spending, manufacturing output and inflation partially reversed the softening trend seen in data just a month ago,” Powell said in his semi-annual congressional testimony. ‘ said.
Employers added 517,000 new jobs in January. It was his biggest job burst in six months, but the unemployment rate dropped to his half-century low of 3.4%. Employment growth is likely to slow by more than half from the massive pace reported last month, but is expected to continue at a solid pace in February.
Retail sales also rebounded sharply in January after a slump in December. And worst of all, from December he went up in January after prices fell from the previous month for the first time since the pandemic began.
The silver lining is that economists are currently unconvinced that a recession may be on the horizon. Goldman Sachs cut its recession probability for the U.S. economy over the next 12 months from 35% to 25%, according to a Feb. 6 memo to clients. Meanwhile, in his January poll by the National Association for Business Economics (NABE), call volume dropped from 64% to 56%.
But Fed officials hope they can land the economy “softly” — a code to gradually cool demand and inflation, sending the financial system into a “hard” recession landing. Without -Possibility: What if the Federal Reserve can’t land planes at all?
“We are on the wrong track,” says Chris Campbell, chief policy strategist at the Kroll Institute and former assistant secretary of finance for financial institutions. “As alarming as it is for American families and the American economy in general, strong economic data is bad for the Fed’s goal of keeping inflation under control.”
A stronger economy could mean further rises in interest rates, which could mean more economic pain for consumers.
The policymakers’ biggest goal was to throw cold water on the toughest price pressures in 40 years.
Fed officials have hiked rates by 4.5 percentage points since March 2022, the most since Jimmy Carter was president and since Queen’s “Another One Bites the Dust” dominated the charts. It’s a page that wasn’t there. Officials said he raised interest rates by a quarter of his percentage point in February, assuming the US economy began to bend under the weight of monetary policy. This is his lowest amount in 10 months.
Policymakers had hinted at plans to keep rate hikes at smaller, more traditional amounts until the Fed decided it was time to do so. We estimate that the US Central Bank’s so-called peak “terminal rate” could be between 5% and 5.25%. But seven officials see rates rising even higher than that level. Five officials set his Fed’s main interest rate at his target range of 5.25-5.5%, and two saw rates rise to he’s 5.5-5.75%.
However, the Fed submitted these forecasts before inflation and employment overheated. A “no landing” for the U.S. economy could mean even higher interest rates, and perhaps more aggressive rate hikes, are needed to get the job done.
The Fed will not update these forecasts until the March rate-setting meeting. Still, Powell joined Fed President Chris Waller in calling for a higher peak. In a pivotal speech on Friday, Waller said he would support rate hikes beyond the two ranges of 5% to 5.25% and 5.25% to 5.5% if employment and inflation “continue to overheat.”
After some encouraging signs of progress, we cannot risk a resurgence in inflation. Wishful thinking is no substitute for the hard evidence of economic data.
— Christopher Waller, Federal Reserve
Will the Fed Stick to a Quarter Rate Hike? Only Time and Data Will Tell
Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard said in their speeches following the Fed’s February interest rate decision that they are calling for a significant 0.5 percentage point rate hike at the Fed’s rate-setting meeting in February. , added that even more significant interest rate hikes are needed. Being at the table for the subsequent meeting.
At a press conference on Feb. 16, Mester referred to the debate about when to stop raising rates, saying, “At the moment, nothing leads me to think that we really need to focus on that issue.” said.
Powell said in Tuesday’s speech that a faster pace of tightening could be justified if “the data as a whole” continues to show the economy is hotter than previously thought. rice field.
Still, officials will continue with the more traditional 0.25-point rate hikes for fear that the February cut would look like a mistake, according to projections by Andrew Patterson, CFA, senior international economist at Vanguard. You may prefer Patterson now sees the Fed rate hikes reaching 5.5-5.75%. This is his highest since 2001.
“We need to see two months of data before we’re ready to judge trajectory changes,” says Patterson. Still, “the pace of deflation in goods has begun to slow, and inflation in services remains relatively persistent. We would like to see a change in trend. The way to achieve that is to raise terminal fees somewhat higher.”
Data has provided a lot of buzz for investors. Through early February, market participants expected the Fed to raise borrowing costs to 5% to 5.25%, before cutting them to 4.75% to 5% by the end of the year, according to CME Group’s FedWatch. This has been superseded by fairly aggressive expectations, with interest rates he is expected to peak at 5.5-5.75% by June.
Soft, hard or no landing? “The plane must land at some point.”
Vanguard’s Patterson says he prefers to stick to the term “will land later” than “don’t land.” His reasoning: the plane must land at some point. Without it, inflation may not get off track.
The Fed sees risks on both sides. Not doing enough could give inflation time to heat up. As positive leisure and hospitality employers continue to demand more workers, firms will continue to raise wages and pass on their high labor costs to consumers if no progress is made in easing the job market. There is a possibility. Known as wage-price spirals, this series of inflation has been difficult for the Fed to untangle.
Fed Chair Powell has repeatedly said since November that job growth is “well above” the pace needed to keep pace with population growth.
“It is very likely that some softening in labor market conditions will be necessary as inflation in this sector needs to return to restore price stability,” Powell told parliament on Tuesday.
Higher interest rates mean a more volatile economy and higher borrowing costs
However, higher interest rates can be disastrous for consumers as well. Home equity lines of credit, auto loans, credit cards, etc. typically rise in line with the Fed’s move. Credit card interest rates are at all-time highs, but these borrowing costs are already at their highest in more than a decade. Average interest rates on 30-year fixed-rate mortgages have also surged for the second consecutive week amid the recent rise in inflation.
Higher borrowing costs, which are blunt instruments and designed to slow down economic activity and spending, can also weigh on business growth and investment. In other words, increasing unemployment and delaying hiring may be the only way the Fed will slow inflation.
Robert Hetzel, an economist at George Mason University’s Marcust Center and who worked at the Richmond Fed during the Great Inflation of 2018, said the Fed is giving markets and consumers a deep recession. It says it can benefit from informing how it can reach its 2% inflation target without triggering it. 1970s and 80s. One problem is that economic data are time-lag and authorities may not be able to determine whether they have taken sufficient steps to keep inflation down until the labor market is hit.
“There is no strategy to assure the public that we will get out of this era without repeating the mistakes of the 1970s,” he says. “There’s still a long way to go. The question is, are we going to repeat the 1970s and keep raising interest rates until we hit a real recession? Is there a way to lower inflation without forcing the economy into a real recession?” ?”
Even with a less severe recession akin to a “soft” economic landing, unemployment could still rise. The official’s latest forecast puts the unemployment rate at 4.6% by the end of the year, more than a percentage point above current levels. Meanwhile, inflation is believed to have fallen to more than 3% he.
A “soft” landing may mean people don’t have to hunt so long for the next opportunity. Style landings can also feel bumpy.
“Some people seem to be trying to fight gravity,” Campbell says, referring to the possibility of “no landing.” “The economy will land somewhere. You never know where it will land.
Steps to take financially in a high interest rate environment
Higher Federal Reserve interest rates would raise borrowing costs, boost yields on savings accounts, and increase the risk of a recession.
As interest rates continue to rise, consumers should consider limiting their vulnerability to rate hikes. We also need to find ways to take advantage of higher borrowing costs, which can help during recessions.
Refinance a variable rate loan to a fixed rate loan: Don’t let interest rates rise by taking a variable rate loan.
Reduce high credit card debt. Not paying off your balance in full each billing cycle can cost you hundreds, if not thousands, of additional dollars a month. This goes up every time the Fed raises rates.
Work on improving your credit score: Your credit history is the most important factor in ensuring you get the lowest or highest bank rate from your lender.
Deposit your money in bank accounts that welcome cash with open arms: Top-yielding online banks pay more than 4% annual yields on depositors’ cash, compared to the national average yield of 0.23%. On a $10,000 balance, that could be a difference of $23 from over $400 a year in interest.
Consider increasing your career and income opportunities to help you weather the recession. Consider monetizing your side hustle or hobby to earn extra cash that you can save for emergencies.