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The Fed’s Crystal Ball is as Foggy as Mine

The title of this week’s Weekly Wire is not meant to denigrate in any way the US Federal Reserve as an institution or the thousands of Americans who work at the world’s most important central bank. As we have written about before, correctly managing monetary policy for the world’s largest economy strikes us as a near impossible task, and that is before even considering that every decision the Fed makes on interest rates and balance sheet management is both relentlessly scrutinized on Wall Street and in Washington and has a meaningful impact on economies and central banks around the world.

Instead, the title speaks to the fact that any macroeconomic forecast – even one from an institution that employs 400 Ph.D. economists – should be taken with a grain of salt. By way of example, coming out of its December 2021 meeting, the Fed predicted that inflation, based on the Personal Consumption Expenditures Index (or PCE) would sit at 2.6% in 2022 and the Fed Funds Rate would hit 0.9% in 2022 (see the Fed’s December 2021 Summary of Economic Projections, lower and mid-left). Well, as 2022 winds down, the PCE sits at 6.0% and the Fed Funds Rate sits between 3.75% and 4.0%. Clearly, the Fed badly missed the mark when it came to its projections for inflation and interest rates in 2022.

This turn of events is worth keeping in mind as the Fed gets set for its final meeting of the year on December 13th and 14th and gets set to release an updated Summary of Economic Projections (coming out of its September 2022 meeting the Fed predicted the Fed Funds Rate would hit 4.6% in 2023; it is most likely the December Summary will show that target moving higher still). We wonder – given growing evidence of waning inflation and a weakening US economy – if the Fed, after underestimating where the Fed Funds Rate would get to in 2022, might end up overestimating where the Fed Funds Rate might get to in 2023.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 2349-BCI-12/05/2022

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