In January, the Fed kept rising interest rates despite low unemployment and GD
2023 started with great hopes about the future, hopes immediately crushed by the Federal Reserve and the European Central Bank. After two years of inflation following the Covid recession, another recession is looming over the global economy.
That’s because the Federal Reserve keeps raising interest rates, therefore taking us closer and closer to a recession. So the normal question to ask is: when will they stop?
The latest interest rate hike was on January 31st, when the Fed reached the 4.50-4.75% level, the highest in 15 years. However, January’s increase was actually lower than usual, indeed it was about half of what they had been doing every meeting until then.
Does it mean that this was the last interest rate hike? Well, nobody knows for certain. It surely signalles a willingness to slowly abandon this strategy. However, rates will likely keep going up for at least another couple of meetings.
The Fed’s main worry at the moment is inflation. Until inflation reaches the desired level of 2%, interest rates will remain high. The latest read on US inflation was 6.5%, way above the “healthy” amount desired by the Fed.
Predictions have it that central banks will stop this strategy in September. That is that interest rates will either keep going up or remain steady until then. Only afterwards, if inflation has finally been annihilated, will central banks lower interes rates.
Fears of recession
Obviously now the question becomes: will the economy survive until September? High interest rates, after all, take us ever closer to recession.
Again, it is difficult to answer this question. Economy is a difficult subject to predict as there are billions of factors at play at any given time. What we can try to do is look at the current situation and attempt some forecasts.
As a matter of fact, the economy is currently holding it up much better than previously thought. American GDP grew in 2022 by 2.1% and unemployment is at historically low levels.
Even in Europe the situation is better than predicted. The energy crisis turned out to be a baseless fear, thanks to the warm temperatures in December and the unified price cap on Russian oil.
Behind the curtains, however, there are some factors that hint to a rotten base despite the healthy facade. Specifically, housing prices in the US keep increasing, as well as the core inflation (inflation without considering food and energy prices).
Further, in Europe inflation is still at very, very high levels. In Germany, for example, inflation is now what it used to be at peak levels in the United States: more than 9% year-on-year.
Therefore, interest rates hikes in Europe could continue even if they stop in the United States. And this would most definitely bring the old continent into recession.