The Federal Reserve fulfilled the script. The United States central bank is trying to counter the highest inflation in four decades with the most aggressive rate hike since then. This Wednesday, its monetary policy committee approved a 0.75 percentage point increase in official interest rates to a range of 3.75%-4%, the highest rates since the first half of January 2008. It is the sixth increase this year and the fourth in a row. around that amount in less than five months. The central bank predicts that rates will continue to rise, and although it opens the door for the next increases to be at a slower pace, it also warns that it is possible that price increases will last longer and take the price of money to a higher level than planned so far.
In its statement, the Reserve predicted further increases in interest rates, but added that “to determine the pace of future increases, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects activity and inflation, and economic and financial developments.” .This last sentence, which was not in the September statement, may sound like it is willing to stop that rate of growth, which caused the stock market to react upwards, but then turned around after the intervention of Jerome Powell, the chairman of the Federal Reserve Board. The S&P 500 index, the most representative for the American market, closed with a drop of 2.5%.
Powell did not close the door to another aggressive campaign. “The moment is coming to stop the pace of rate increases. Maybe at the next or the next meeting,” he said at the press conference after the decision, in which he also said that it was “very premature” to talk about a pause in the increase.
“We are firmly committed to returning inflation to our 2% target,” Powell said. Inflation is now above 8%. “Over time, financial conditions have tightened significantly in response to our policy measures, and we are seeing effects on demand in the sectors of the economy that are most sensitive to interest rates, such as housing. However, it will take time for the effects of monetary tightening to fully manifest themselves, especially on inflation. That is why we say in our statement that when determining the pace of future increases, we will take into account the accumulated tightening of monetary policy and the delays with which monetary policy affects economic activity and inflation”, it was expanded.
He also warns that the level to which rates must rise could be higher than previously expected. “At some point, as I’ve said in the last two press conferences, it will be appropriate to slow the pace of increases as we approach the level of interest rates that will be low enough to bring inflation down to our 2% target. . There is a lot of uncertainty around that level of interest rates, so we still have a lot of work to do. And the data since our last meeting suggests that the final level of interest rates will be higher than expected,” he said.
The Fed had expected rates to peak at around 4.5% next year, but is now thought to be as high as 5%. “Our decisions will depend on the totality of the data received and their implications for the outlook for economic activity and inflation. We will continue to make decisions from meeting to meeting”, he pointed out without committing and warned that in order to stop the rate of price increase, inflation will have to fall.
The next monetary policy meeting will be held on December 13 and 14, immediately following the release of November inflation data (October data will be released next week). So far, inflation has taken root more than expected and is barely hinted at by a rate hike.
Powell acknowledges that bringing down inflation will likely require a prolonged period of low growth and a cooling labor market, but he seems more determined to go too far than too short. “Historical background advises against premature easing of monetary policy, so we’re going to stick with it until the job is done,” he said, later explaining that if it gets to the point where they realize they’ve tightened monetary policy, the Federal Reserve has the tools to correct it. course.
slowing down of activity
“The main motivation for such an aggressive rate hike continues to be the still high inflation data, with the core rate moving further in September to 6.6%, a strong Q3 2022 GDP report, and low unemployment rates and high supply jobs that show the labor market is still overheated,” said David Kohl, chief economist at Julius Baer, in a note.
At the same time, Kohl adds, leading indicators point to a slowdown in economic activity, with areas of the economy most sensitive to interest rates, such as construction, already contracting. Investment plans have been reduced, and the overall outlook for companies has significantly worsened. Julius Baer believes the Fed’s focus on lagging indicators and a rapid rate hike of 300 basis points (three percentage points) in just five months “increases the risk that the Fed will excessively tighten” monetary policy while ignoring the large gaps that exist between rising rates and slowing inflation.
Not since 1994 has the Fed raised rates sharply by 75 basis points (0.75 percentage points), and now it has done so for the fourth time in a row since June. A 50 basis point increase has already been exceptional: the last before this year came in 2000, when Alan Greenspan was trying to burst the tech bubble. From then on, the normal thing was a fine adjustment, step by step from 25 to 25 basis points.