We may just have to survive the entire year of 2023 with high US interest rates. Three presidents of local branches of the Federal Reserve have said in separate speeches that the central bank wants to do everything it can to bring inflation under control. This means that the interest rate in 2023 will probably rise and remain above 5.1 percent.
What is the interest rate now?
The interest rate is currently at 4.25 to 4.50 percent. It is a margin, because this is a kind of target interest rate of the Federal Reserve. They advise banks to lend money to each other within this margin. In practice, it does not stop with advice, but it happens. This ‘recommended interest rate’ forms the basis for all other interest rates. The higher the Federal Reserve cuts this interest rate, the higher the interest rates for the rest of the economy.
This of course becomes problematic when a large part of the economy has to refinance. Think, for example, of mortgages with a variable interest rate, but also companies that have to refinance. The longer interest rates remain at these high levels, the more pressure there will be on the economy.
Ultimately, that is also the goal of the Federal Reserve, to put pressure on the economy. They secretly hope that companies get into trouble, unemployment rises, consumption falls and inflation falls with it. So far, this has not succeeded, although inflation is slowly starting to fall.
What’s the danger?
The danger is that the Federal Reserve will go too far and keep interest rates at these relatively high levels for too long. Then it can just happen that the economy ends up in a severe recession and the Federal Reserve is not waiting for that. High inflation is still better than mass unemployment. analysts expect according to Reuters that the policy could lead to the loss of more than 1 million jobs.
It is striking that the market and the Federal Reserve do not completely agree. While the market currently expects interest rates to not exceed 5 percent, the Federal Reserve calls for this to be necessary to bring inflation under control. However, the market does not believe this, because they believe that there is a good chance that we are heading into a recession and that the Federal Reserve should reconsider its policy.