WASHINGTON, Dec 2 (Reuters) – New projections from the U.S. Federal Reserve, released later this month, alongside an expected half-point hike in interest rates, could show that the target rate for the central bank is heading towards levels last seen on the eve of the 2007 financial crisis, and will also reveal policymakers’ best estimate of the fallout that will have for a so far resilient labor market.
A stronger-than-expected US jobs report for November showed companies added 263,000 workers, with hourly wages rising at an annual rate of 5.1% and the size of the workforce itself. even declining – all signs of a tight yet accelerating labor market even as the Fed hopes it will begin to cool.
Coupled with a modest decline in inflation so far, new projections from the 19 Fed policymakers are expected to show rates continue to rise and remain high through 2023, thwarting current market expectations for rate cuts. rate by the end of next year.
“The Fed has told us that pushing up unemployment and lowering wage growth is going to take a long period of restrictive policy, and today’s data provides more evidence to that effect,” the Jefferies economist wrote. , Thomas Simons. “It does not distract the Fed from the widely expected 50 (basis points) rate hike at the next meeting, and it gives us greater confidence in our expectation that the terminal rate will rise above 5% next year. “
The last time rates exceeded 5% was from June 2006 to July 2007, at the start of the financial crisis and recession from 2007 to 2009, when the fed funds rate peaked at around 5.25% .
The updated outlook released after the December 13-14 meeting of the Federal Open Market Committee will be another opportunity for officials to show how they expect their “rise and sustain” strategy to play out in terms of ultimate level of the policy rate. , and the increase in growth, inflation and above all unemployment.
The meeting will cap off a volatile year that has seen the central bank react to the fastest spike in inflation since the 1980s with the fastest interest rate hike since then to offset it. The aggressive response sent a shock through the financial system which at one point wiped out nearly $12 trillion of US stock market value and more recently pushed mortgage rates to 7% for a population used to the cheap money.
Stock markets have been rising lately and exploded this week when Fed Chairman Jerome Powell, in what was likely his last public remarks before the meeting, said the Fed was ready to slow down after a series of four back-to-back three-quarter-point rate hikes in favor. of the planned half-point increase.
It was a potentially awkward result for a Fed chairman who wants to maintain tight financial conditions and keep public expectations firmly focused on fighting inflation.
But Powell was also candid about the compromise. Even if the central bank begins to move in half- or quarter-point steps in the coming months, the policy rate is heading towards a still-undefined “appropriate and restrictive” stopping point, and officials intend to leave it there “for a while”. “
Fed officials from San Francisco Fed President Mary Daly to St. Louis Fed President James Bullard, often at odds with recent policy debates, have both discussed rates likely to top 5 % next year.
“WAY TOO HIGH” INFLATION
During a lengthy conversation at the Brookings Institution this week, Powell sketched out what could be a long transition for the United States to a world of only slowly receding inflation, high interest rates and shortages. potentially chronic labour.
To slow the pace of price increases, he said it was clear that energy needed to be undermined from a labor market where the demand for workers remains well in excess of the number of people ready for jobs – an imbalance housed in American demographics and immigration policy, and amplified by the pandemic.
The new summary of economic projections will include estimates of the size of the toll Fed officials say Fed officials will pay in terms of rising unemployment and slowing growth as its policies begin to bite. .
Powell said he still sees a “plausible” path to a “soft” landing with only modest job losses.
But so far, the adjustment is not going fast.
Data released Thursday showed the Fed’s preferred inflation measure was 6% in October, down from 6.3% in September and the lowest this year, but still triple the rate. Fed’s 2% target.
Jobs data released on Friday showed little sign of change there either.
The economy has created an average of 392,000 jobs per month this year. Although the pace fell to 277,000 from August to November, this figure is still higher than the 183,000 added monthly in the decade before the pandemic.
The Fed’s projections accelerated throughout the year to catch up with reality. Last December, officials expected the key rate to end 2022 at just 0.9%, with the preferred measure of inflation falling to 2.6%. The highest projection for individual federal funds was just 1.1%.
It was a factor of four: with the half-point increase expected at the next meeting, the key rate will end the year in a range between 4.25% and 4.5%.
Powell this week acknowledged the difficulty of making forecasts in an environment still troubled by the pandemic and its aftermath.
But there is also no choice as the central bank ends its frantic rush to “preload” rate hikes with larger rate hikes and begins, as Powell described it, to “feel ” the path to a breakpoint.
In September, the Fed’s narrative still included a benign outcome of continued growth, steady progress in inflation and an unemployment rate up less than a percentage point to 4.4% at the end next year from 3.7% currently – what some have called “immaculate disinflation” at little cost to the real economy.
The federal funds rate ended 2023 at 4.6%.
It will need to be “a bit higher,” Powell said, and the November jobs data could push it up a notch. Future projections will show that the final destination may be in sight and give a better assessment of the capacity of the labor market to cope with it.
November’s average income data, coupled with revisions from previous months, is “consistent with inflation of about 5%,” Jason Furman, former chairman of the White House Council of Economic Advisers, wrote on Twitter. “I allowed myself to have more hope of a soft landing, but this pretty much shattered that hope.”
Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci
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