Fed Chair Powell’s Biggest Fan Janet Yellen Sees Inflation ‘Much Lower’ by End of 2023

The U.S. Federal Reserve is expected to start its last meeting of the year on Tuesday, with investors widely expecting policymakers to increase interest rates by 50 basis points, marginally slowing down the pace of rate hikes after four consecutive 75 basis point increases.

Investors are also hoping that Fed Chairman Jerome Powell will provide further guidance about future monetary policy in his press conference after the Fed’s two-day meeting.

Additionally, the latest consumer inflation figures are also due to be released on Tuesday. Investors will be pouring over that data for insights into whether the Fed’s rate hikes have been effective in pushing back against rising prices.

The consumer inflation report comes on the heels of Friday’s producer price index data that showed wholesale prices had risen by more than expected in November.

In addition to the inflation data, other stronger than expected slices of economic data indicated that rates may have to be increased further and stay higher for longer to tame inflation and concerns about a recession linked to the pace of rate hikes spread.

Former Fed Chair Yellen Supports Current Fed Chief Powell

Although not directly mentioning the Fed or Chairman Jerome Powell, Treasury Secretary Janet Yellen acknowledged the work they have been doing in trying to lower inflation, while attempting to dodge a recession.

Sees Reduced Inflation

Yellen on Sunday predicted a significant reduction in inflation by the end of 2023, while also noting the continued risk of a recession.

“I believe by the end of next year you will see much lower inflation if there’s not … an unanticipated shock,” Yellen told Norah O’Donnell during an interview that aired Sunday on CBS’ “60 Minutes.”

“I am very hopeful that the labor market will – remain quite healthy – so that people can feel good about their finances and their personal economic situation,” she added.

Says There is Risk of Recession

Yellen also said there was risk of an economic recession, though she noted how the country currently has a “healthy banking system” and a “healthy business and house hold sector.”

“There is a risk of a recession,” Yellen added. “But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

What to Expect from the Fed

Regardless of Yellen’s comments, the Fed is going to stay on its tightening path. Policymakers are expected to slow the aggressive pace of interest rate increases it has pursued since July.

Unless the consumer price index is off the charts to the upside, we expect Powell to follow-through with his plan for smaller rate increases until inflation is controlled. If there is going to be a surprise it will be in regards to the level of the Fed’s terminal rate and the duration of rate hikes.