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The U.S. Federal Reserve has all but promised to begin raising interest rates next month as inflation raged at 7 percent, a 40-year high, in December and as the Fed is ready to end its $120-billion monthly bond purchases that has propped up the U.S. economy and equity markets since March 2020.
At a 26 January press conference, Fed chair Jerome Powell refused to rule out the possibility that the central bank could raise rates at every one of its meetings this year.
“There’s a risk that the high inflation we’re seeing will be prolonged…that it will move even higher,” he acknowledged. “We have to be in a position with our monetary policy to address all of those plausible outcomes.”
Last March, most Fed officials were confident that rates would remain near zero until 2024. Over subsequent meetings last year, as inflation sped far past the bank’s 2-percent target, more and more members of the bank’s rate-setting committee came to believe that a boost would be needed sooner—first in 2023, then in late 2022, and then as soon as the bank could end its bond-buying spree.
Still, as he spoke to reporters, Powell demurred on what the bank would do when it meets next month.
“It isn’t possible…today…to tell you with any confidence what the precise path will be,” he said.
“Making appropriate monetary policy in this environment requires humility, recognizing that the economy evolves in unexpected ways,” he added. “We’ll need to be nimble so that we can respond to the full range of plausible outcomes.”
However, he indicated that the Fed will tighten policy more aggressively than it did through 2016, 2017, and 2018, when it lifted rates twice, three, then four times, respectively.
In its quarterly forecast last October, the Fed projected three rate hikes in 2022.
Asked if three would still be enough this year, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said, “We just don’t know. It’s going to depend on supply chains [and] what happens to workers.”
Analysts have been less coy than Fed officials.
“We now look for seven [quarter-point] hikes this year and a peak funds rate of 2.75 to 3 percent,” Bank of America economists said in a 28 January note to clients.
“This should affect the economy with a lag, weighing on 2023 growth,” they forecast.
Fed-watchers at JP Morgan Chase had expected four rate bumps this year; now, after late January’s Fed meeting, they foresee five.
Powell’s comments last week “were clearly intended to dissuade the market from expecting a quarterly tempo of rate hikes,” they told clients.
More than a dozen central banks have already raised rates this year.
The Bank of Canada has signaled a rate increase next month, with investors expecting more to follow. South Africa bumped up its rate last week, as did Singapore and Chile (see related story in this issue).
Australia’s central bank is ending its COVID-related bond purchases this week.
TREND FORECAST: The Fed will not balance the urgency to raise rates with market behavior. The central bank will raise rates, possibly 50 basis points in March, if not sooner.
We maintain our forecast that they will raise rates and slow down the economy, and then speed it up, as the Reagan administration did back in the early 1980s, prior to the 1984 Presidential Election.
However, as we have predicted, when rates rise to around 1.5 percent to 2 percent, equity and real estate markets will take a sharp turn south.