All eyes are on interest rates because, rightly so, they are the biggest macroeconomic known unknown the world faces in 2023. This week the picture became even more uncertain as financial markets initially interpreted US Fed chair Jerome Powell’s latest comments as dovish, but ongoing evidence of a rampant US labour market suggested even more rate hikes may be necessary.
The Federal Reserve Bank of Atlanta president, Raphael Bostic, responded to the surprise numbers by saying the jobs report raised the possibility that interest rates would need to increase to a higher peak than expected. Powell this week concurred that the central bank would need to implement further rate increases and “we think that we’ll need to hold policy at a restrictive level for a period of time”.
Before the data, the prevailing view was that there would be two more 25-basis point hikes before the Fed pivots to an easier monetary policy stance because inflation has shown convincing signs of slowing. Expectations are holding out for possible rate cuts before the year is out. Thus, the outlook remains tremendously uncertain, both macroeconomically and geopolitically. Most concerning is that the greatest risk is that central banks will overdo it on the monetary policy front by increasing rates too far — to the extent that unnecessary damage is inflicted on economies already feeling the dampening effects of the previous rate hikes.
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