Amid a gloomy outlook for the U.S. economy in 2023, the Fed's main goal is to bring inflation back to a 2% target over the next few years.
The world's largest central bank is pursuing this goal by maintaining tight monetary policy long enough to curb economic activity in the United States.
In the way of achieving the medium-term inflation target, there are major risks facing the Federal Reserve, which it will aggressively seek to overcome throughout the new year, and we will try through this report to shed light on those risks.
Economic Growth
Economic growth in the United States is likely to be more solid than expected by the Federal Reserve, as the world's largest economy is expected to receive additional support in the new year as the federal government broadly weighted spending increases.
Monetary tightening
Tight monetary policy may not be enough to significantly curb economic growth, as Fed officials believe that the 2.5% federal funds rate will be neutral when inflation hits 2%.
This seems to suggest that a target interest rate of 5% on Fed funds (compared to the current range of 4.25%-4.5%) – or slightly more – should be sufficient to achieve the desired result.
Price Trend
Global financial markets as well as the Federal Reserve may be too attracted to the decline in commodity price inflation.
The upward pressure towards rising commodity prices is always likely to be transient and highly transitory, mainly resulting during the recent period from the shift in the structure of demand towards commodities at the height of the Corona pandemic, which has receded at the present time.
If you are prepared to ignore transient pressures on commodity prices as they go up, you should also ignore them as they are on the way down, as commodity price inflation is likely to fall from its original trend in 2023 before returning to a rising path in 2024 and beyond.