March 13, 2023

I’ve been asked what’s happening lately with interest rates and inflation. To me, it’s a case of good news, bad news.

The good news is inflation has fallen significantly since June 2022, as measured by the Consumer Price Index (see chart below). Many forecasters expect this trend to continue in 2023, but it may still take more to get inflation under control.

And therein lies the bad news. While the big inflation drop allowed some to predict lower interest rates in late 2023, there is no evidence to back this claim.

In fact, the Federal Reserve intends to continue raising the federal funds rate. And the central bank’s leaders said they will then hold the rate there indefinitely.

The upcoming Fed meetings this month and in May will be interesting. Many think rates will rise at each meeting, followed by a pause. That could put the federal funds rate at 5.00%-5.25% by early May.

The great unknown is what will happen with inflation. Will it continue to fall, or will it level off? Either way, it’s unlikely it will be at or near the Fed’s 2% target. However, the Fed doesn’t want to raise rates so much that it invites a recession.

Even still, I don’t think we’ll see interest rate cuts this year for a couple reasons.

First, Chairman Jerome Powell indicated rates will probably need to remain at 5% or more. He mentioned price reductions in late 2022, but also said more evidence is needed to be confident inflation is on a sustained downward path.

Second, no Fed members predicted rate cuts in 2023. Given this, I’m not sure why people think rates will drop.

So, it’s good news, bad news. And since the Fed telegraphed its intentions, I think it’s safe to expect higher rates for a while.