Fed Sees Further Hikes In 2023, Here’s What Could Change That
The first concern the Fed has is basically risk management. They want to be sure inflation is contained before they dial back on rates since price stability in Powell’s view is the “bedrock of the economy.” At the moment, Powell noted that the Fed, continues “to see risks to inflation as weighted to the upside.” If the Fed does not aggressively fight inflation now, then coming back and raising rates again could lead to even more pain for the economy.
That’s why the Fed has downplayed a few months of encouraging inflation data. Also, the Fed’s goal is 2% inflation and not falling inflation, as a result, the Fed wants to be sure that inflation will continue to move lower and won’t remain stuck at around 4% or 5%.There is good news. The Fed recognizes that the prices of goods are generally falling, Powell noted at the December interest rate announcement press conference that, “goods inflation has turned pretty quickly”..
However, the Fed would like to see service inflation move lower too before it has real confidence that U.S. inflation is under control and moving back to its 2% goal. Part of the reason the Fed has the ability to be patient on inflation is that the jobs market is currently robust. If that changes and recession looms, as
suggests is probable, then the Fed may have a difficult trade-off to make. So ironically, the Fed’s views on inflation currently have as much to do with the jobs market and wage growth than the inflation data itself.
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