Economic Outlook - January 2023
- As they did throughout 2022, the Federal Reserve hiked interest rates again in December by 50 basis points, lifting their target rate to 4.25-4.5%. The hawkishness of the Federal Reserve has surprised many economists, as it is the most aggressive tightening cycle the U.S. has experienced in decades. With this most recent December interest rate hike, we are now at the highest fed funds level in 15 years. In December the Fed stated that they are still seeing modest growth and inflation remains elevated. The Fed has telegraphed that rate hikes will continue into 2023, albeit at a much slower pace.
- The drastic moves by the Federal Reserve, intended to slow economic growth and surging inflation, have yet to take full effect. The third quarter GDP estimate was revised higher to 3.2% from the earlier estimate of 2.9%. When the Federal Reserve implements policy tools, there is a lag effect as it takes ample time to ripple across the economy, companies, countries, and consumers. Weaker economic trends are emerging, as November retail sales declined by 60 basis points from October, the largest decline of the year.
- Inflation has been front and center for investors this year after hitting the highest rate in four decades last June. In November, the consumer-price index (CPI), which measures the prices consumers pay for goods and services, fell 60 basis points to 7.1%. Lowering CPI will remain a focal point of the Federal Reserve in 2023.
- Rates on 30-year mortgages dropped for a second straight month to 6.27% after reaching 20-year highs in October. Just one year ago, in December of last year, the average on a 30-year mortgage was 3.05%. Three months ago, Fed Chair Jerome Powell made the Fed’s intention of raising rates and its effect on the housing market very clear when he stated that the U.S. housing market would get “reset” by a difficult correction. The most recent measure of home prices, as measured by the lagged Case-Shiller National Home Price Index, fell 0.3% in October. The drop of almost 2.5% since June marks the first decline since 2012.
- The labor market continues to be tight, but growth across many industries is slowing. Wage pressures continue to weigh on businesses, with states and cities across the U.S. set to increase minimum wage at the start of 2023. In fact, 27 states in 2023 will be increasing minimum wages. In December, the Labor Department reported that unemployment benefits in the U.S. were in line with pre-COVID levels.
Source: Factset, Federal Reserve, Federal Reserve Bank of St. Louis, Freddie Mac, U.S. Department of Commerce, U.S. Department of Labor
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