- Fed’s Powell affirms rate hikes to continue in 2023, but markets show doubt
- Economist Roubini sees a prolonged recession as issues mount
- Central bankers need to do a better job, and more dissent might help
Major central banks managed to achieve some consensus at the end of the year as most of them raised their rates by a uniform 50 basis points in the final policy meeting of 2022. But investors are right to be puzzled about what lies ahead in the new year.
Federal Reserve Chairman Jerome Powell affirmed in no uncertain terms last week that the fight against inflation will continue next year with more rate hikes, even though they will probably be smaller than the four 75-bp hikes this year.
“I wish there were a completely painless way to restore price stability,” Powell said on Wednesday following the two-day meeting of the Federal Open Market Committee. “There isn’t.”
Powell and his cohorts indicated that they will not reduce rates until 2024, but financial market participants aren’t so sure. They are betting that either Fed policymakers are wrong again – they have been wrong almost every step of the way – and will cut rates next year once inflation declines. Or else, the interest rate hikes will plunge the U.S. into a recession and compel the Fed to cut rates.
Nouriel Roubini, who is known as Dr. Doom for a good reason, has no doubt about which of the alternatives will prevail. “This is not going to be a short and shallow recession,” he told the Financial Times in an interview published Monday. “It’s going to be deep and protracted.”
For good measure, Roubini added that as bad as things look for the U.S., Europe is much worse off. He recounted in the FT interview how -- having been born in 1958 -- things were less concerning when he was growing up.
This time is different, he warns.
“It’s different relative to the last 75 years of relative peace, progress and prosperity, because before then the history of humanity was a history of famine, war, disease and genocides and so on.”
Roubini’s reputation rests on his 2006 prediction of a recession ahead of the housing slump. That forecast was correct, but optimists nonetheless hope his current gloomy outlook is mistaken or exaggerated. The economist cites climate change, artificial intelligence, trade wars, political polarization, Russian and Chinese aggression, and a host of other things that make this time so treacherous.
The only glimmer of hope in this view is that it benefits from new technology, such as nuclear fusion, although Roubini worried that the 15 to 20 years it would take to make fusion work is too long.
The FT interviewer was a bit worried about Roubini’s credibility, but a more significant concern is the doubt financial markets have in the face of Powell’s protestations of Fed commitment. The Fed’s mistakes over the past 18 to 24 months have damaged its credibility, so investor doubt may not be misplaced.
A year ago, FOMC members were projecting a total rate increase for all of 2022 of just 75 bp – something they managed to do in each of four successive meetings, with other hikes along the way. As a result, the year is ending with a target rate of 4.375% instead of the 0.875% predicted late last year.
For a growing number of investors, the problem is that Fed policymakers talk too much. If there was a need for forward guidance at one point, it no longer seems helpful.
At the end of the day, though, we need central banks to do a better job. That would probably entail an end to seeking safety in numbers, with a more vigorous debate and dissent in the FOMC and other policy panels. Let’s hope for the best.
Disclosure: No financial assets were cited in the present article.