Inflation Control Efforts
The Fed began raising interest rates considerably last year to combat inflation, which peaked at 9.1% in June 2022, the highest in four decades. In November, inflation had dropped to 3.1%, still well above the Fed’s target of 2%. Goolsbee cautioned against declaring victory prematurely, stating that while progress had been made in 2023, more data was required before celebrating. Notably, historically, major recessions have accompanied substantial efforts to lower inflation by central banks globally.
Goolsbee conveyed that although 2023 looks promising in terms of significantly reducing inflation without a substantial rise in unemployment, it’s crucial to remember that inflation remains above the target. Therefore, counting the chickens before establishing a clear path to reach the target would be an exaggeration.
Concerns and External Threats
Goolsbee acknowledged several concerns, including a 12% year-over-year increase in homelessness, as well as rising delinquencies in credit card debt, auto lending, and small business lending. He highlighted that escalating oil prices, a resurgence of wars, a collapse in China, a major credit crunch in the US, or deterioration in the banking sector could manifest as significant external threats or supply shock problems for the economy. History has shown that easier soft landings have been derailed by such external shocks in the past.
Fed’s Economic Projections
During the recent policy meeting, the Fed’s economic projections demonstrated that the majority of officials anticipate interest rates to decline to 4.6% by the end of 2024. This suggests the possibility of at least three quarter-point rate cuts next year, with no officials indicating expectations of rate increases in the coming year. The FOMC statement highlighted that although inflation has eased over the past year, it remains elevated. The Fed will monitor the economy to determine if any further rate hikes are necessary.
At a press conference following the meeting, Federal Reserve Chairman Jerome Powell explained that the inclusion of the word “any” in the statement acknowledged the likelihood that the current rate cycle has reached or is near its peak.