Wednesday, January 11, 2023

No US rate cuts soon

 

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” the chairman [of the Fed, Jerome Powell] said in prepared remarks for the panel discussion in Stockholm. Powell's comments focused on central banks' independence and were short of details on the coming interest-rate decisions. The Federal Reserve raised the fed funds rate by 50bps to 4.25%-4.5% during its last monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007, and in line with market expectations. Fed Officials also have signaled their intention to lift the rate above 5% in 2023 and keep it there throughout the year.
 


World and US central bank discount rates have risen more over the last year than they rose between 2004 and 2006.  That rise led (eventually) to the 2008/2009 GFC (global financial crisis).  So it's not implausible to expect a similar recession at some point in the near future.  The GFC was worsened by financial collapse caused by debt default as house prices plunged in the US.  This cycle, we don't have a US property crisis (yet) but house prices have started to fall.  But in every economic downturn accompanied by rising rates, there are debt defaults.  Which sector, and which country, we don't know yet (Developing countries?  Housing?  Over-leveraged zombie companies?)  The global recession has barely begun.  It will continue, and the probability is that there will be debt defaults, which will make things much worse.

The moral of Powell's story is that the Fed Funds rate won't be falling from here, and may still rise.  Which will prolly make the inevitable recession worse. 

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