In their last Federal Open Market Committee (FOMC) meeting of 2022, Federal Reserve officials voted to increase their target federal funds rate by 50 basis points, to 4.25-4.5%. The move was expected, as was the rate of increase. But the question now is, what will the Fed do in 2023?
Markets have been hoping for a pivot for months, longing for a return to lower interest rates and easy money. But the Fed thus far has shown itself unwilling to budge from monetary tightening until inflation is fully under control.
The one thing everyone expected was that the Fed would stop its 75-basis point increases and opt for a more conventional 50-basis point increase. Some were hoping for a 25-basis point increase, given the somewhat muted inflation figures that came out in December. But the big question everyone wants to know is, what will the Fed do in 2023?
Interest Rates Up or Down?
The first thing that probably needs to be said is that not even the Fed knows what its going to do this year. After all, after its December 2021 FOMC meeting Fed officials foresaw PCE inflation being within the range of 2.2-3.0% in 2022. Instead, it was above 6% for most of the year.
Similarly, FOMC participants assumed that the midpoint of the target range for the federal funds rate would be between 0.25% and 1.25% for 2022. Instead, the midpoint has been far higher.
Given that big miss, can we assume any better prognostication for the coming year?
At the latest FOMC meeting, Fed participants expected the central tendency of PCE inflation to run in the 2.9%-3.5% range for 2023. And the midpoint of the target federal funds rate was expected to be 4.75% to 5.75%, with most participants coalescing around a 5.0-5.25% rate.
That would seem to indicate that Fed officials anticipate one or two more rate hikes, or potentially a larger number of smaller rate hikes. Will that be accurate?
Given FOMC participants’ big miss last year, it’s hard to take them seriously this time around. They clearly underestimated how severe inflation would be this year. And now they seem to be overly optimistic about how much the Fed will be able to bring inflation down.
Expecting inflation to be cut in half seems excessively optimistic. For one thing, inflation has been awfully stubborn so far. And if the economy falls into recession next year, the Fed could be tempted to cut interest rates and return to monetary easing. That easing could in turn keep inflation elevated.
One important thing to keep in mind is that Fed officials won’t ever forecast a recession. Their predictions are always going to err on the side of being rosy. So even though they may predict slow economic growth in 2023, they’re still predicting growth, not recession. If the economy continues to head toward recession, which many people think is all but inevitable, then the FOMC projections for 2023 get completely blown to hell.
If the economy falls into recession, then we have to assume that the assumptions or predictions about the future of the federal funds rate are thrown into question as well. So at this point we’re in the same situation as we were in last year.
Last year, astute observers saw the writing on the wall and pointed out that inflation was rising and was likely to keep rising. The Fed didn’t agree, and assumed that it had things under control. Those policymakers may not have learned from last year’s mistaken forecasts.
What Should the Fed Do?
Some within the Fed, like St. Louis Fed President Jim Bullard, think the Fed should continue raising the target federal funds rate even above the 5% that most FOMC participants foresee. In his estimation, and in the minds of those who follow the Taylor Rule, the federal funds rate should be 7-9% or more right now. Certainly with inflation still at 7%, a 4.5% federal funds rate still results in a negative real federal funds rate.
Granted, the real federal funds rate has been negative for much of the post-2008 period, with 0% interest rates being under the rate of inflation. But it’s been severely negative for most of this year, far more than we’re used to.
Perhaps the Fed is thinking that getting back to a -2% real rate would be sufficient to bring inflation down enough that it could resort to its normal conduct of monetary policy and keep slowly nudging inflation down. But that seems unlikely, given how persistently high inflation remains.
Everyone is going to be watching in 2023 to see what the Fed does. The FOMC’s makeup in 2023 won’t be particularly hawkish, so a slowing of rate hikes might not be surprising. But given Chairman Powell’s insistence that the Fed is going to stay the course until inflation is under control, the Fed could very well keep hiking for a while next year.
The Fed’s Influence on Markets
Whatever the Fed decides to do, it’s undeniable that its influence will be felt in markets. It has been the 800-pound gorilla in markets since 2008, and that won’t change next year. Markets are going to watch the Fed’s every move, readjusting every six weeks depending on what the FOMC decides at its latest meeting.
That doesn’t bode well for regime certainty, however. Just imagine if a business had relied on the FOMC’s forecasts to plan for 2022. It obviously would have had to make some major adjustments. And if businesses were to plan based on this year’s forecasts and then have to change things, it could end up being quite disruptive.
This kind of regime uncertainty isn’t good for markets, businesses, or individuals, all of whom like to have at least some certainty about the future, or at least about which direction the future is headed. Instead, we’re all waiting for some sort of recession to occur, and hoping that once it gets here it will quickly pass and fade into the background. In the meantime, we have to worry about how we’re going to protect ourselves in the event of that recession, which itself would require some foresight and planning.
Many Americans have already taken steps to try to protect themselves against that threat, by buying gold and silver. Gold and silver have served as safe haven assets for centuries, and their performance during times of turmoil has made them a favored wealth protector for those fearful of recession or inflation.
There’s a very good chance that gold could rise in price if a recession hits next year, and the Fed’s moves could amplify that. But there are a lot of variables that can change between now and then, and the uncertainty about what could take place is unnerving a great many people.
If you’re one of those people, and if you want to protect your savings and investments against what may be coming, maybe now is the time to start thinking about investing in gold and silver. Call the experts at Goldco today to learn more about how gold and silver can help you.