My 3 Big Economic Predictions for 2023

We are but a few moons shy of a new year. So, before all the “2023 Predictions” begin flooding your newsfeeds, let me toss my thoughts out there on what the coming year could look like. 

Let’s start with the biggest monkey wrench the world knows: the Federal Reserve. 

First, I will say “I was wrong” in predicting the Fed would stop raising interest rates this fall. I originally thought the Fed would slow its roll at the November meeting. That did not happen. The Fed raised rates again by 0.75 percentage points. 

However, I did win a small battle in that losing war. 

The recently released minutes of that Fed meeting reported that “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.” 

Translation: A big majority of Fed members are kinda sorta worried that the economy has not caught up with all the big ol’ rate hikes across 2022, and they see a need to probably step away for a while from the bong they’ve all been hitting…meaning that as of November, as I thought would be the case, the Fed began to realize that it needs to stop raising rates so aggressively. 

As for 2023, the Fed will most definitely return to more normalized 0.25 percentage point rate increases. Better yet, I think the Fed actually stops raising rates, possibly by late spring. 

The Fed Funds Rate—the rate the Fed pushes and pulls on to manipulate the economy—is already at 4%, and that’s causing a world of hurt among consumers and the housing market. Frankly, 4% is already too much, but the Fed is as obstinate as a brick wall. As it pushes rates higher, it’s going to find increasingly loud politicians and increasingly angry businesses and consumers. 

Heck, even the Fed’s own internal economists have recently said, “Yo, my dudes, we might want to chill a bit with this interest-rate meshuggeneh before we tank the economy.” Or at least, words to that effect. 

So, my prediction is that rate hikes stop late spring. We might even see a rate cut, depending upon the severity of the recession the Fed is willfully brewing up. 

Next up: “risk-on” assets. 

Here, I am specifically talking about stocks and crypto. 

This past year has been as bloody as a slaughter house for pretty much every investment category aside from the dollar and gold. (Gold, which typically moves opposite the dollar, has actually held up really well this year. It’s down only about 1.4%, a hint that the gold market realizes the dollar’s strength is a lie, but more on that in a moment.) 

When the Fed finally says, “Th-Th-The, Th-Th-The… That’s all, folks!!” on its interest rate hikes, we’re going to see stocks and crypto boom. Both markets have been looking for any reason to rally because the bear market they’re both currently suffering through has been entirely fabricated by the Fed’s over-reacting to its own 2021 mistake in calling inflation “transitory.” 

Outside of the Fed, there’s nothing economically that should be weighing so heavily on stocks and crypto that their prices have been undercut so dramatically.  

We’re already seeing hints of what’s to come. 

When those Fed minutes from November were released and the market read that line about needing to probably slow the rate-hike cycle, stocks and crypto rallied and the dollar dove. When the word is official, we’re going to see that happen again, only on steroids this time. 

Which means now is a particularly opportune moment to grab high-quality crypto and high-quality stocks. 

As for the dollar…insert funeral dirge here. 

That’s prediction #3: The buck is in trouble in 2023.  

Its rise over the last year was, as with the fall in stocks and crypto, entirely a function of the Federal Reserve aggressively raising interest rates. 

Currencies trade in pairs, like dollar-euro or euro-yen, etc. When one currency offers a higher interest rate than the other side of the pair, currency traders sell the lower-yielding currency to buy the higher yield. Selling pressure pushes down the value of the lower-yield currency while buying pressure pushes up the value of the higher-yield currency. 

Basically, the two currencies sit on a see-saw and as one goes up, the other must go down by definition. 

And going down is going to be the trend of the year for the dollar. 

When the moment arrives that the Fed stops raising interest rates, the wind will stop blowing into the dollar’s sail and the dollar will sink relative to major currencies all over the world, particularly the euro, British pound, Japanese yen, Swiss franc, Norwegian krone, and others. 

The upshot of that… Now is when you want to buy foreign currencies and stocks, and houses priced in foreign currencies. Temporarily strong dollars mean you’re effectively buying other currencies on sale. When the weak-dollar trend re-emerges, assets priced in foreign currencies are going to rise in value in dollar terms because the foreign currencies they’re priced in will buy increasing amounts of dollars. 

So, that’s my three primary predictions for 2023. I have some smaller ones (The Chinese economy explodes back to life now that the country is abandoning its zero-COVID policy, boosting Chinese stock markets and the Chinese yuan…and Hong Kong unpegs its dollar from the U.S. dollar) but for now those three are the big ones I will be following closest as the new year unfolds.