April 23, 2023
Pranjal Gupta

How high will interest rates go up in 2023?

In early March, during his semi-annual update to Congress, Jerome Powell, Chair of the Federal Reserve, expressed the Fed's readiness to increase interest rates faster if deemed necessary. However, soon after his remarks, a number of banks including Silicon Valley Bank collapsed, creating uncertainty in the financial markets partly in response to the higher interest rates. Later in the month, the Fed increased the Federal Funds Rate by 0.25 percent, which was seen as a cautious move, given the market's uncertainty and the Chair's earlier comments on a faster pace of rate hikes. The economy added 236,000 jobs in March, causing the national unemployment rate to fall by 0.1 percent to 3.5 percent. Additionally, the Bureau of Labor Statistics reported that average prices increased by only 0.1 percent in March, down from the previous months.

Together, these three events and data points indicate that inflation is slowing, the labor market is loosening, and some financial institutions are feeling the pressure of higher rates.

Looking ahead to 2023, the Federal Open Market Committee (FOMC) has projected that the median Federal Funds Rate (FFR) will be 4.6 percent, which was revised in March to hover between 5.1 and 5.6 percent. After a 0.25 percent increase in late March, the FFR currently stands between 4.50 and 5.0 percent. While there are no planned rate increases for April, the Fed may implement another round as early as May 3. However, based on the current employment and inflation reports, it seems unlikely that the Fed will increase the pace at which they hike rates. This is because pushing rates too high could cause a recession if aggregate demand falls too low due to high unemployment.

The Federal Reserve projects an increase in unemployment, which may lead some companies to lay off workers in response to increased borrowing costs or higher rates applied to their debt. Amazon, Meta, Twitter, and many others have already announced layoffs in the tech and financial sectors as these companies begin to adjust their economic outlook. In March, the FOMC projected that unemployment in 2023 would range between 4.0 and 4.7 percent, which is between 0.5 to 1.2 percent higher than the current national rate. According to Senator Elizabeth Warren, a one percent increase in unemployment is equivalent to two million workers being stripped from the labor market. The Fed has acknowledged that Black and Hispanic workers could be disproportionately impacted by the projected increase in unemployment, as the unemployment rate for these groups will likely increase by more than the national average.


However, the central bank has not clarified how a situation where workers of color are disproportionately affected by job loss will reduce inflationary pressure. If working-class people are the first to see their jobs eliminated and inflation remains high, the costs for some communities to stabilize prices will be much greater. Meanwhile, corporations across sectors are making record profits while millions of workers are at risk of losing their jobs under these monetary conditions.


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