Corporate Profit Margins
Source: Federal Reserve Economic Database and U.S. Bureau of Economic Analysis
2023 Inflation and Interest Rates
Inflation is expected to gradually trend lower in 2023; the challenge will be to reduce not only the overall rate of inflation, but also the rate of inflation on those products that are not interest rate sensitive. As of September, the expectation by the Federal Reserve is that the annual rate of core inflation (all items less Food and Energy) will fall to approximately 3% in 2023. Rising interest rates will lower consumer and business spending, but uncertainty remains over inflationary contributing factors that the Federal Reserve cannot control, such as the impact of the Russia- Ukraine war on global food and energy prices. Theoretically, the Federal Reserve acts in an independent manner to balance economic growth with inflation. The Federal Reserve tries to accomplish this goal through targeting the “fed funds rate” – a very short-term interest rate that when changed, typically has a rippling effect through the financial markets. The Federal Reserve influences this rate by primarily controlling the money supply in the United States. The amount of money circulating in the economy has an impact on interest rates and credit conditions - more money, lower interest rates; less money, higher interest rates. The federal funds rate is increased when the Federal Reserve decreases the money supply by selling Treasury securities (technically called Open Market Operations). Increasing interest rates is the primary way the Federal Reserve fought inflation in 2022 and will continue to fight inflation in 2023. Central banks around the world, including the United States, Europe, the United Kingdom, and Canada, have all raised interest rates to combat inflation. The goal is to increase borrowing costs, which in turn lowers overall demand through reduced consumer and business spending, which in turn lowers the rate of inflation. The federal funds rate started 2022 at a historical low of 0.00-0.25%; the federal funds rate will end the year at over 4%, which is a historically large increase in any given year. In March, the Federal Reserve began the upward trek for interest rates, including the unprecedented move of four consecutive 75 basis point increases in 2022. The expectation is for interest rates to peak in early to mid-2023 before declining. Increasing interest rates will reduce the overall rate of inflation as borrowing costs are increased, resulting in decreased consumer and business demand. The chart below shows the daily federal funds effective (market) rate since January 2018.
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Center for Business and Economic Insight
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