The Fed’s inflation forecast was wrong and Powell should not try to mitigate recession risks, according to RBC

  • According to RBC, the Fed again missed its inflation forecast on Wednesday.
  • The bank’s chief economist said the Fed’s forecast for inflation next year is hard to justify.
  • Powell also shouldn’t try to mitigate recession risks, because some Fed officials already see a recession in the cards.

The Fed’s inflation forecast was wrong at this week’s Federal Open Markets Committee meeting, and Jerome Powell should not be trying to mitigate recession risks, according to RBC Capital chief economist Tom Porcelli.

“Some of their economic forecasts are just scratchers,” Porcelli said in a note on Wednesday. Referring to the inflation expectations of central bankers for next year. Officials revised their median forecast for core inflation in 2023 up by 40 basis points — something that’s hard to justify, Porcelli said, because inflation has slowed faster than economists predicted in November.

“Almost half a percentage point increase in core inflation? What data are they looking for?” He said. “We thought even before they made this adjustment that their predictions would be wrong. Well, now it would be even more wrong.”

It comes after the central bank announced a widely expected 50 basis point rate hike yesterday, but rattled markets by suggesting that interest rates will remain high over the next year. Some economists worry that inflation expectations will become entrenched in the economy if the Fed doesn’t keep interest rates tight — but that also risks tipping the US into a recession, with the federal funds rate now at its highest level since 2007.

The unexpected revision in inflation expectations may be due to officials likely providing their estimates ahead of the release of the November CPI report, which saw inflation fall to 7.7%. But even before that, prices were on a downward trend, and inflation could fall more quickly than the data shows, due to the delayed impact of the Fed’s rate hikes and the fact that real inflation in the economy lags behind the official statistics.

Wharton professor Jeremy Siegel previously warned that leading indicators of inflation, such as house prices, have eased this year, although that won’t show up in the CPI for another 18 months. And the Fed warned of the risk of tipping the economy into a recession — a fear echoed by Wall Street bankers, who warned that Fed-induced deflation could cause stocks to drop as much as 20%.

Powell tried to allay recession fears on Wednesday by pointing to the Fed’s median GDP forecast in 2023, which shows half a percent of growth. But that number is a year-over-year change, Porcelli cautioned, and it doesn’t explain the US slipping into recession for a few quarters. A closer look at the Fed’s forecasts shows that 17 out of 19 officials think the US will have slower growth, with the lower forecast predicting a recession.

“He shouldn’t be trying to mitigate the risk of a recession. This frantic cycle of hiking will do some damage,” he added.

Officials expect rates to reach 5.125% in 2023, according to Federal Reserve projections. Central bankers are expected to meet again at the next Federal Open Market Committee meeting in late January to discuss their next policy move.

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