The Consumer Price Index (CPI) has been lower than forecasted for three consecutive months. November\u2019s latest CPI at 7.1% vs. forecasted 7.3% added to the downward inflation trend. At this rate, is the Federal Reserve likely to reach its target inflation goal in 2023?<\/p>\n
The Federal Reserve pincered the economy between two extremes since March 2020. Having bloated its balance sheet by ~$5 trillion, the overflowing money liquidity propelled both the stock and crypto market to their all-time highs. By mid-2022, the cost of central banking\u2019s \u201cfree money\u201d began to manifest itself in the highest inflation rate since the early 1980s.<\/p>\n
Given its dual mandate \u2013 employment and price stability \u2013 the Federal Reserve responded with the fastest rate hiking cycle in over 40 years. As the third consecutive month that positively exceeded expectations, November CPI at 7.1% vs. forecasted 7.3% shows that the Fed got on top of inflation.<\/p>\n
The Federal Reserve takes both inflation metrics into account, CPI and core inflation. The latter disregards volatile food and energy prices, making it a more useful indicator that is less prone to lag. The Fed\u2019s core inflation target is still at 2%. For November, core inflation also beat estimates at 6.0% vs. 6.1%, which is 3x above the Fed\u2019s target.<\/p>\n
The world\u2019s central bank is now increasingly in a more favorable position to avoid a deep recession.<\/p>\n
The Fed\u2019s loose monetary policy led to a hot economy, manifested as price instability \u2013 inflation. The Fed started to cool the economy by increasing the cost of capital using higher interest rates. The cooling manifested as asset price suppression across the board.<\/p>\n
In other words, the Fed could cool down the economy into a recession as consumer demand is suppressed. At $75 per barrel, the West Texas Intermediate (WTI) crude oil benchmark has already dropped to the year\u2019s lowest point, indicating significant demand reduction.<\/p>\n
BlackRock, the money manager with $9 trillion AuM that the Fed hired in 2020, also warned that 2023 will be a historic cooldown year.<\/p>\n
\u201cRecession is foretold as central banks race to try to tame inflation. It\u2019s the opposite of past recessions: Loose policy is not on the way to help support risk assets, in our view.\u201d<\/em><\/p>\n BlackRock 2023 Global Outlook report.<\/cite><\/p>\n For the Fed\u2019s next meeting on December 14th, the market expects (80% probability) the central bank to increase the rate by 50 bps into the 4.25% \u2013 4.5% range. This will break the four-consecutive 75 bps streak, with a potential hike pause afterward. This seems more likely, given another critical indicator.<\/p>\n The Fed\u2019s asset suppression has also reduced tax revenue, which dropped 10% in November, or $29 billion from a year prior.<\/p>\n Lower federal revenue translates to a lower ability to pay government debt (treasuries). For this reason, the Fed has historically avoided raising interest rates beyond the level of 2-year treasury yields, according to 3Fourteen Research.<\/p>\n Will the Fed be done hiking after next week’s meeting?<\/p>\n Watch the relationship between the Fed Funds Rate and 2-Yr Yield.<\/p>\n 2Yr = 4.35% Inversion could be at hand.<\/p>\n Historically, after the FFR-2Yr inverts, the Fed is done tightening. pic.twitter.com\/YQUkFONtkK<\/p>\n \u2014 3Fourteen Research (@3F_Research) December 12, 2022<\/p>\n The expected December 50 bps hike aligns the Fed Funds rate in that range. In other words, the Fed will likely have to count on the already achieved inflation downward trend to resume its momentum. Otherwise, the Fed is entering uncharted waters, historically speaking.<\/p>\n After all, if lower tax revenue leads to a higher deficit, it leads to a higher supply of treasuries. The Fed would then have to rely on foreign countries to buy them. If the demand is not there, treasury yields would have to go up. This would lead to a stronger dollar, hurting international US companies and decreasing federal tax receipts.<\/p>\n We may end up in the rate-cutting phase to avoid uncharted waters. In turn, the inflation\u2019s downward trend would only be temporarily halted in 2023.<\/p>\n This article originally appeared on The Tokenist<\/i><\/p>\n Sponsored: Tips for Investing<\/b><\/p>\n A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.<\/p>\n Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses,\tconsider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.<\/p>\nWhy Further Inflation-Combating Hikes May Not Be on the Table<\/h3>\n
\nFFR = (moving to) 4.5%<\/p>\n