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By Robert Eisenbeis, Ph.D.
Buoyed by what appears to be a continued moderation in PCE inflation based upon data for November, the FOMC moderated slightly the pace of policy tightening of its target range for the federal funds rate. It increased the range by 50 basis points, as had been expected by market participants, down from the 75-basis point increases it had engineered at its previous four meetings. The Committee also released its Summary of Economic Projections (SEP), with some interesting changes from its last release.
The Committee sees slower growth in both 2023 and 2024. The median growth is seen to be about 0.5% in 2023, compared to the 1.2% forecast in the September 2022 SEP, and about 1.6% in 2024. Unemployment is seen as increasing to 4.6% in 2023 and remaining at that rate in 2024. PCE inflation is projected to decline by the end of the year to 5.6% and slow further to 3.1% by the end of 2023, to 2.5% in 2024, and to 2.1% by the end of 2025. Finally, the Committee sees interest rates remaining slightly higher than in September, peaking at 5.1% in 2023, about 0.5 percentage points higher than projected in September, and then declining to 4.1% in 2024 and to 3.1% in 2025. Importantly, there does not seem to be any recession expected in these forecasts, and that was confirmed by Chairman Powell in his post-meeting press conference.
The most significant question posed at the post meeting press conference concerned whether the Committee was going to slow the size of rate increases, perhaps as early as next year, from 50 basis points to perhaps 25 basis points at each meeting. Powell firmly stated that, with rates moving into a more restrictive range, the important question was not the size of rate increases but rather how high rates needed to be and how long they would remain at that level. That would depend upon inflation and progress made in bringing it down to 2%. He went on to note that at present, there are two issues worth considering in assessing progress. Powell observed that goods inflation is declining, in part because of demand and in part due to improvements in supply chains. At the same time, services inflation is not showing similar progress. This is due in part, he said, to the fact that a significant component of services costs, and hence of prices, is related to labor costs. While wages are increasing, shortages of labor and the unusually strong and tight labor market make progress on services inflation difficult and likely to take some time. He noted that there was not the expected increase in the participation rate due in part to retirements and to the Covid-related deaths of some 500,000 people who would otherwise still be working. The result is that there is a shortage of about 4 million workers, relative to demand, at this time.
The bottom line was that the Committee did not see a recession on the horizon and remained determined to get inflation down in a way that minimizes the pain.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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