The Federal Reserve’s recent interest rate forecast has caused volatility in global markets, including cryptocurrency markets. Fed Chairman Jerome Powell announced that interest rates would continue to increase well into 2023 and remain high until inflation comes down. The Fed’s announcement comes after months of central banks around the world raising interest rates to combat inflation. The Dot Plot, which shows how high Fed officials think rates will go in the coming years, prompted the decline in markets. Additionally, Jerome warned that the Fed would continue to raise interest rates to bring demand back in line with supply to curb inflation.
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Understanding the Federal Reserve’s Interest Rate Forecast and Economic Projections
Last week, the Federal Reserve held its final meeting of the year, revealing its interest rate forecast and economic projections. Fed Chairman Jerome Powell’s subsequent press conference held importance for investors, as his statements can move markets. In this article, we’ll summarize what Powell said during the conference and explain what it means for the crypto market in the coming years.
Background
Since March of this year, the Fed has been raising interest rates to combat inflation. This resulted in a crash in basically every asset class, as liquidity was being sucked out of the financial system. Interestingly, it technically takes around a year for higher interest rates to affect the actual economy. However, the markets are forward-looking, meaning that investors are always pricing in the future. This is why the press conferences and comments by Fed officials are so significant. They are meant to give investors expectations of what’s to come for interest rates.
The Importance of Forward Guidance by the Fed
The Fed’s guidance is one of the ways it influences interest rates, especially longer-term rates. Naturally, investors like it when their expectations are met, and when outcomes are in line with or exceed expectations, this can result in a rally, even if the outcome is objectively bad. Conversely, when outcomes fail to meet investor expectations, the markets tend to crash. This is why there has been no shortage of uncertainty around the Fed’s future interest rate plans in recent weeks, creating a lot of volatility in the markets.
The Fed’s Interest Rate Forecast and Economic Projections
Jerome Powell acknowledged in his speech at the conference that inflation is hitting the average person hard. The Fed is committed to bringing inflation back down to its two percent target, and there is still more work to be done, with more rate hikes to come. The Fed decided to raise interest rates by 0.5 percent or 50 basis points, which is what investors had been pricing in, causing the markets to rally in response.
The Fed’s economic projections show that the U.S. economy has slowed, and annual GDP growth will probably be around 0.5 percent for this year and the year after, consistent with recessionary conditions. However, Jerome pointed out that the labor market continues to be strong, with unemployment at a 50-year low and average wage growth being much higher than the Fed’s 2 percent target.
Jerome then revealed that the Fed expects unemployment to spike to over 4.6 percent next year, which historically has been associated with recessions. He discussed the Fed’s latest Dot Plot, which reveals that most Fed officials see interest rates at 5 percent or higher in 2023, causing the markets to crash.
In conclusion, the Fed will continue to raise interest rates to bring demand back in line with supply, to bring inflation back down. Lowering interest rates too soon can result in a resurgence of inflation, as seen in the 1970s. Investors should watch out for the Fed’s forward guidance and how it affects the markets, including the crypto market.
