Prediction Of Interest Rates in 2023

We all know no one has a crystal ball in telling the future. We also know that the future is best predicted by analyzing historical events, looking for patterns, and then making a conclusion based on how those data points relate to the current times. I used Bard (Google's version of Chat GPT) to assist in obtaining historical data points in conjunction with collaborating with independent analysts at Urban Digs to develop a prediction on whether or not the FED will raise or decrease rates by the end of 2023.

How Historical Data Can Predict The Fed's Decision on Rates

Correlation between unemployment and inflation with fed rate cuts

The above chart (via Bloomberg) shows the correlation between unemployment and inflation to the FED cutting rates. You can clearly see the FED has a pattern in cutting rates when unemployment is between 5-6% and when inflation is below 4%. A study by the Federal Reserve Bank of Atlanta found that the average unemployment rate was 5.9% when the Fed cut rates between 1948 and 2018. This suggests that the Fed tends to cut rates when the unemployment rate is relatively high. The current unemployment rate is 3.7% and inflation is at 4%. This helps formulate my prediction which I will formally indicate after making the points below:

Here are some of the factors that could lead the Fed to raise, keep, or lower interest rates in 2023:

Inflation: If inflation rises, the Fed may raise rates in an effort to combat inflation.
The economy: If the economy grows too quickly, the Fed may raise rates in an effort to prevent inflation from rising. If the economy slows down, the Fed may keep rates unchanged or even lower rates in order to stimulate the economy. (The economy is expected to slow down in 2023. The Fed's forecast for real GDP growth in 2023 is 2.0%, down from 2.3% in 2022.) The US economy grew by 1.3% in the first quarter of 2023, according to the Bureau of Economic Analysis. However, this growth was slower than the 2.6% growth in the fourth quarter of 2022. The average first-quarter economic growth in the US is 2.2%. However, there has been a lot of volatility in recent years, with growth ranging from -2.9% in 2020 to 6.9% in 2021.
Employment: If unemployment falls too low, the Fed may raise rates in an effort to prevent inflation from rising. If unemployment rises too high, the Fed may keep rates unchanged or even lower rates in order to stimulate the economy. Employment levels in the United States shrank in May 2023. The Bureau of Labor Statistics reported that nonfarm payroll employment decreased by 310,000 in May, and the unemployment rate rose by 0.3 percentage points to 3.7 percent.

Inflation Is Falling

*Data Source: U.S. Bureau of Labor Statistics: All items in U.S. city average, all urban consumers, not seasonally adjusted.

My Prediction Is That The Fed Will Raise Rates OR Hold At Best

Let's recap for one second;

The FED has a pattern of cutting rates when unemployment is between 5-6% and when inflation is below 4%. Inflation is currently at 4% and has been decreasing consistently.
A study by the Federal Reserve Bank of Atlanta found that the average unemployment rate was 5.9% when the Fed cut rates between 1948 and 2018. The current unemployment rate is 3.7%
The US economy grew by 1.3% in the first quarter of 2023. The average first-quarter economic growth in the US is 2.2%

Considering the above, inflation is coming down and the economy is slowing although unemployment is at a strong level. This tells me the FED seems to be accomplishing its goal of a soft landing. The economy and unemployment are at strong levels that don't warrant a decrease in rates seeing the level of inflation. Thus my prediction is that rates stay the same if not increase by the end of 2023 and I'd be more than shocked if they were to decrease (unless inflation were to be closer to 2% unemployment rises close to 6% or a combination thereof consistent with the above-stated patters).

My Prediction For The Real Estate Market in 2023

The real estate market boils down to the simple ratio of supply and demand. Each local market should measure the increase or decrease in pending contracts to active inventory and compare it over the previous quarter, year, and historical data. High-interest rates and the minimal activity in printing money from the Central Bank have led to historical inventory increases in real estate due to the decrease of demand. The real estate markets that have low and especially record low supply will be more resilient in facing a downturn in prices.

I like to say the market has been choppy in NYC. Inventory is falling however there isn't a tremendous spike in demand. Activity will soon decline until October due to its consistent season trend (see chart below). One could say the market is neutral however there are great deals out there I've been negotiating for my buyers some of which acquired assets as much as 15% below the historical value of identical comparable sales. I believe better deals will be had for buyers as time progresses especially come the slow winter season. The smart sellers are pricing ahead and investors should be selective on what they buy today. If you are curious about what you should do and would like to work with one of the top real estate agents in NYC click here. If you are located outside of NYC I personally interview agents for clients who are looking to buy or sell in out-of-area markets (both nationwide and internationally).