- The Fed was wrong again on its inflation forecast on Wednesday, according to RBC.
- The bank's chief economist said the Fed's projection of inflation next year was hard to justify.
The Federal Reserve's inflation forecast was wrong at this week's Federal Open Markets Committee Meeting, and Jerome Powell shouldn't be trying to water down recession risk, according to RBC Capital's chief economist Tom Porcelli.
"Some of their economic projections are just head-scratchers," Porcelli said in a note on Wednesday, pointing to central bankers' inflation projections for next year. Officials revised their median prediction for core inflation in 2023 upwards by 40-basis-points – which is hard to justify, Porcelli said, since inflation cooled faster than economists expected in November.
"The nearly half-percentage point increase in core inflation? What data are they looking at?" he said. "We thought even before they made this adjustment their forecast was going to be wrong. Well, now it will be even more wrong."
That comes after the central bank delivered a widely expected 50-basis-point rate hike yesterday, but jolted markets by signaling rates would stay high through next year. Some economists fear inflation expectations could become entrenched in the economy if the Fed doesn't keep rates tight – but that also risks tipping the US into a recession, with the Fed funds rate now being at its highest level since 2007.
The unexpected revision in inflation projections could be because officials likely submitted their estimates before the release of the November Consumer Price Index report, which saw inflation cool to 7.7%. But even prior to that, prices were on the downtrend, and inflation could be falling more rapidly than the data shows, due to the delayed effect of Fed rate hikes and the fact that real inflation in the economy lags behind the official statistics.
Wharton professor Jeremy Siegel previously warned that inflation-leading indicators like home prices, have fallen off this year, though that won't show up in the CPI for another 18 months. He warned the Fed risked overtightening the economy into a recession—a fear that has been echoed by Wall Street bankers, who have warned that a Fed-induced downturn could cause stocks to drop 20%.
Powell attempted to assuage recession fears on Wednesday by pointing to the median Fed GDP projection in 2023, which shows a half percent of growth. But that figure is a year-over-year change, Porcelli warned, which doesn't account for the US slipping into a recession for a few quarters. A closer look at Fed projections show 17 out of 19 officials think the US will have even slower growth, with the low-end projection predicting a recession.
"He shouldn't try to water down the recession risks. This aggressive hiking cycle is going to cause some damage," he added.
Officials expect rates to reach 5.125% in 2023, according to Federal Reserve projections. Central bankers are expected to reconvene at the next Federal Open Markets Committee meeting in late January to discuss their next policy move.