January 9, 2023
As we start 2023, everyone wants to know how high will interest rates go and if there will be a recession. Time will tell, of course. But a Federal Reserve official warned that the federal funds rate might have to hit 5-7% to get inflation under control and the stock market immediately plunged.
I think there’s widespread agreement that the federal funds rate must rise to get inflation under control. But I don’t think anybody really thinks it’s going to go much higher than 5% (a rate that seems to be priced into financial markets).
So, how high will rates go in 2023? No one knows.
Can the Fed get inflation under control without causing a recession? That answer may be a bit clearer. Just a few weeks ago, it looked like a tall order. The economy contracted by just over 1% in the first half of the year. But in the third quarter, it rose by more than 2%.
So, this situation can go one of two ways. Either we’re not going to enter a recession, or inflation is not going to be tamed.
Of course, there’s another potential solution, but it won’t we be popular in Washington D.C. We could cut spending. The federal government has been running budget deficits for a long time. For this year, the deficit was $1.38 trillion (after $2.8 trillion in fiscal year 2021).
That’s largely due to massive COVID-19 relief. But that spending is done, so deficits are expected to fall. Mind you, they’ll still be huge, just maybe not in the trillions. Unsurprisingly, most economists agree that if we were to balance our federal budget and eliminate budget deficits, inflation would largely disappear.
However, we all take deficit spending for granted. It happens every year, without fail. So it’s clear there are three factors in our future: interest rates, recession, and spending restraint (or lack thereof).