Fed Says It Won’t Raise Rates Through 2023

No Rate Hike & Dovish Guidance

As expected, the Fed didn’t raise rates on Wednesday. Furthermore, as you can see from the chart below, guidance calls for no rate hikes through 2023. Just 3 members see hikes in that year, but that doesn’t mean much. Technically, we could have a new chair by then, but most don’t think the new chair or new members will have different worldviews from the current Fed.

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Trend is towards being more comfortable with higher inflation which is ironic because we haven’t gotten much inflation recently. Fed is comfortable with the ghost that is sustainable core 2% or higher inflation. Some think the Fed might hike rates in 2023. Even if that ends up happening, the Fed probably wouldn’t guide for that until late next year at the earliest.

If the recovery goes the way many think it will, we will have a sharp decline in unemployment as the COVID-19 tests allow the economy to go back to normal. Inflation will be boosted by the increase in wage costs along with the fact that commodity production has suffered. A cure for low commodity prices is low prices because it lowers supply. It will take a few quarters to get supply going again. That’s why oil can reach $80 per barrel in the next upcycle.

Changes To Fed’s September Statement

Fed’s first change to its statement showed more optimism as it went from “Following sharp declines, economic activity and employment have picked up somewhat” to “Economic activity and employment have picked up.” Getting rid of the word “somewhat” is pivotal. The rate of economic improvement has fallen, but on an absolute basis in the past 2-3 months, the economy has gone from being in a bad recession to early signs of a normal recovery.

Technically, the economy probably wasn’t in a recession in May and June, but the deepness of the economic decline was so bad, that on an absolute basis the economy was as bad as a recession. A recovery has been going for many months, but finally, we’re starting to see enough improvement in the labor market for this to look like a regular recovery. 

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