FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 31, 2023

IN THIS ISSUE:

1. Inflation Drifts Lower, But Not Fast Enough For Fed

2. Fed Boosts Rates In Response, More Hikes Coming

3. Fed Wants Inflation At 2%, Not Likely To Happen

4. Fed Not Likely To Cut Rates This Year – Here’s Why

5. Border Crossing Deaths Hit Record High In December

Overview – U.S. Inflation Falls Significantly, But…

The huge and largely unexpected rise in inflation to above 9% last year – and the Fed’s swift response – continue to dominate the economic conversation. The good news is, inflation as measured by the Consumer Price Index (CPI) has fallen for the last six consecutive months to 6.5%, and many forecasters expect this trend to continue in 2023.

This significant drop in inflation has led more and more forecasters to predict the Fed will be able lower interest rates in the second half of this year. Yet as I will point out today, there is no evidence the Fed plans to cut interest rates anytime this year. In fact, the Fed intends to continue raising its key Fed Funds rate several more times this year and hold it at that level indefinitely.

So, when you hear pundits on the financial shows and read those who publish their forecasts on the Internet, and they predict the Fed will be lowering interest rates in the last half of this year, take it with a grain of salt. Very likely not happening, as I will discuss below.

Inflation Drifts Lower, But Not Fast Enough For Fed

The Consumer Price Index (CPI), our most widely-followed inflation indicator, shot up sharply last year and remains significantly above the Fed’s target as this is written. Since its last spurt in 2008, the CPI remained fairly docile for the next decade with the Index holding at 2.5% or less for most of that time, as you can see below. No one gave it much thought.

However, since President Biden took office in January 2021, the CPI soared to the highest level in decades. The CPI exploded from near zero percent at the end of 2020 to 9.1% last year.

So, what prices have gone up the most? This may surprise you. Egg prices, for example, have gone up a whopping 60%. Wow! Take a look.

The good news is the CPI has since fallen for six consecutive months to an annual rate of 6.5% as of last month. Some forecasters believe the CPI will continue to fall this year. We’ll see.

Fed Boosts Rates In Response, More Hikes Coming

The Federal Reserve, as we all know, responded to the spike in inflation by hiking its short-term Federal Funds rate several times last year. The Fed Funds target range went from 0.0%-0.25% at the beginning of last year to 4.25%-4.50% by December, as you can see below.

The rate increases in 2022 included four 0.75% hikes and two 0.50% bumps, the most aggressive Fed tightening in decades.

The Fed’s interest rate policy group, the Fed Open Market Committee (FOMC), has indicated it plans to continue hiking the Fed Funds rate target range to 5.0%-5.5% this year and says it is likely to hold it at that level indefinitely – until it is convinced inflation is fully under control.

The FOMC’s next policy meetings are this week, Jan 31/Feb 1, March 21-22 and May 2-3. Most Fed-watchers believe the FOMC will raise the Fed Funds rate by 0.25% at each of these three meetings and then pause. If true, that would put the Fed Funds rate at 5.0%-5.25% by early May, within the Fed’s target range. OK so far.

What is impossible to know, however, is what inflation will do between now and then. Will it continue to fall as most forecasters seem to think? Or will it level off? Either way, it is very unlikely inflation will fall where the Fed wants it to be this year.

Fed Wants Inflation At 2%, Not Likely To Happen This Year

While no one knows for sure, let’s assume the CPI continues to drift lower, say to 5% by early May. The Fed has made it clear it wants inflation back in the 2.0%-2.5% range as soon as possible. To do so, the Fed believes its only option is to raise interest rates and slow the economy so inflation will cool off.

Yet the Fed doesn’t want to raise rates so much that it sparks a recession. This probably explains why the FOMC plans to take the Fed Funds rate to 5.0%-5.25% and not considerably higher as some members of the policy committee have called for.

So, again, most Fed-watchers now expect three more rate hikes of 0.25% each at the next three FOMC policy meetings. It will be interesting to see if the FOMC actually reduces the rate hikes to 0.25% this week following increases of 0.50% in December and 0.75% in November. We’ll have our answer on Wednesday when the next policy meeting adjourns.

Fed Not Likely To Cut Rates This Year – Here’s Why

As pointed out in the Overview above, more and more forecasters are now predicting the Fed will begin cutting interest rates before the end of this year. I do not believe this. Here’s why.

Two reasons: First, Fed Chairman Powell suggested in his post committee meeting press conference last month that once the FOMC gets the Fed Funds rate into the 5.0%-5.5% range, it would likely need to keep it there for an extended period. Specifically, he said:

“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.” [Emphasis mine, GDH.]

To me, this clearly indicates the Fed has no plans to cut interest rates this year.

Second, and equally as important, the December 13-14 FOMC meeting was one of those periodic meetings when each of the 12 Committee members was required to submit his/her economic projections for the next year, including their interest rate forecasts.

I find it very interesting that none of the 12 members predicted any interest rate cuts at all in 2023. Even the most dovish members of the Committee did not see interest rates coming down until 2024. And Chairman Powell seemed to agree in his post-meeting press conference.

The bottom line is: Where these forecasters are getting the idea the Fed will start cutting interest rates in the second half of this year is a mystery to me. I’ve been following the Fed closely for over 40 years, including reading between their policy statement lines now and then. But in the current situation, there are no policy lines that need reading between.

The Fed is being perfectly clear about what it intends to do and why.

End of story as far as I’m concerned.

Border Crossing Deaths Hit New Record High In December

On an unrelated note, in a data dump late last Friday, the Biden administration disclosed that more than a quarter million people crossed the border illegally in December – the highest ever recorded. The timing of this release was designed to bury the news, not that it mattered, since the mainstream media has consistently ignored the growing border crisis.

In addition to the 251,487 illegal immigrants encountered last month are what the government politely termed “got-aways.” These are the illegals who sneak across the border and avoid border patrol agents because they have a good reason to expect they would be expelled.

The number of got-aways over just the past two years is estimated at 1 million – which would make them the 10th largest city in the country. How many of them are gangbangers? Terrorists? Criminals? Who knows?

But that’s not the worst of it. Border deaths also reached all-time highs last year. Over the last fiscal year, at least 880 immigrants died trying to get into the US. That is the highest number of deaths since data became available. The second-largest number of migrant deaths occurred the year before when 566 perished.

To be clear, Democrats have not said that President Biden has blood on his hands for the deaths caused by his open border policy disgrace. They haven’t said anything. But they should be shouting their outrage from the rooftops.

Keep in mind that in 2019 when President Donald Trump was in office, we had one of the lowest number of deaths at the border on record. Yet the media claims that border deaths under Trump were a tragedy, while deaths under Biden are apparently perfectly acceptable.

While this double standard is understandable – the mainstream media always side with the Democrats – this is a national crisis! Not only are our border towns in chaos, these illegal immigrants are being shipped to cities across America without the cities’ permission.

President Biden has done nothing to stop the border crisis, and there is no indication he plans to do so in the future. Americans should be outraged about this but many have no idea how serious this crisis is. This is a tragedy, no matter how you cut it!

Congress needs to take action immediately to deal with the border crisis, but there is no serious indication this is happening. So sad!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

US Inflation Rate Falls To 6.5%, Sixth Straight Monthly Decline

Border Crossing Deaths Hit New Record High In Fiscal 2022

Gary's Between the Lines column:
U.S. Border Crisis Is A Tragedy, Any Way You Cut It

 

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