Interest Rates In 2023: A Recession Could Force The Fed To Cut


The Fed will meet to set short-term interest rates on May 3, but the bigger question is whether the Fed cuts rates this year. 


The Federal Reserve will meet to set short-term interest rates on May 3. Wall Street sees a balanced chance of the Fed either making a 0.25-percentage-point hike or holding rates steady. The Fed likely wouldn’t disagree with that assessment, but leaders are waiting to assess incoming data.



However, the bigger question is: What happens for the remainder of 2023. The Fed expects to hold rates at elevated levels for the rest of the year. However, markets estimate the Fed will cut rates by September, based on economic weakness. The Fed meets eight times a year to set rates, so there is no meeting for April.



Recession Signals

So, the big factor that is likely to drive interest rates for 2023 is whether we see a U.S. recession. Certain indicators imply that one is on the horizon. The yield curve is inverted, an indicator that has historically forecast recessions with some accuracy. House prices are softening, and housing is a key swing sector for the economy.



In contrast, unemployment is at very low levels, implying no recession yet. The unemployment rate did edge up in February to 3.6% as corporate layoffs continue especially in tech, though many sectors including notably leisure and hospitality, continue to add jobs.

If we do see a recession, it may help bring down inflation. That could enable the Fed to ease back on rates. However, for now the Fed is stressing that its goal is to bring down inflation, and it doesn’t see economic weakness.



Source : [Interest Rates In 2023: A Recession Could Force The Fed To Cut]( by Simon Moore, Senior Contributor - Interest r logo


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