Declining houses, fuel prices, car prices, and lower inflation reports on consumer prices have excited investors about inflation’s downward trend. But the buzzkill Federal Reserve rained on everyone’s parade.
As expected, the Fed increased the fed funds rate by 0.50 on December 15, 2022, but they unexpectedly projected that interest rates will go higher in 2023 than they predicted last September. Investors expected the 0.50 rate increase but were caught off guard by the overly negative projections.
I saw some conflicting information. (Remember, the Fed is trying to slow the economy to lower inflation; the primary gauge they watch is unemployment.) The Fed is projecting 2023 will see lower economic growth and unemployment rising to 4.6% from its current 3.7%. Usually, this combination points to inflation lowering, but strangely, the Fed raised its core inflation (without food & energy) forecast for the end of 2023 from 3.1% to 3.5%.
These projections were the reverse of what investors expected after the last few good inflation reports. According to Barclays, bond and derivative markets are now projecting that core inflation will have returned to the Fed’s 2% target in the next twelve months.
Chairman Powell and company are trying to talk tough to tell the world they are serious about inflation. However, the Fed tends to revise its forecast, so I wouldn’t be surprised if they lower their projections as inflation normalizes.
That week in high school when we were sliding was one of my favorites. We ran full out because the higher we could flip the other guy up in the air, the better. Everything was going great until someone accidentally took out a pregnant girl. She ended up being fine but our principal was ready to kill us. I hate to admit it but the buzzkill might have kept someone from getting really hurt. Maybe the Fed will too.
Have a blessed week!
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