Following a two-day meeting, the Federal Reserve (US Federal Reserve) Open Market Committee is expected to announce its decision on interest rates on Wednesday. Powell. The impending decision follows a rate hike last month, for the first time since 2018, and dramatic timing in financial markets that have moved away from the peak to bear territory (defined as a 20% drop from the peak). The market also expects the Federal Reserve to announce the beginning of a reduction in the central bank’s balance sheet, which will swell to $ 9 trillion as part of the expansionary policy adopted since the Corona crisis.
Determination in the recent war on inflation The Fed chairman does not necessarily cover the consequences of the war in Ukraine. The Russian invasion of Ukraine has increased pressure on the inflation environment, and it is unclear how and when the battles will end. Powell faces a difficult dilemma, especially in light of recent data on the slowdown in US economic growth.
Economists expected growth to slow 1.4%
Last November the Federal Reserve internalized that inflation is not temporary, but in the meantime it has continued to climb to levels that have caused discomfort to say the least. U.S. decision-makers have prepared the ground to catch up quickly to curb price rises, even at the price of a slowdown, and investor concerns range from a slowdown to inflation, and both: stagflation. Abandoning the “temporary” notion of inflation created a moderating effect on U.S. growth data in the first quarter of 2022 that surprisingly indicated a 1.4% contraction in U.S. GDP, instead of the expectation of 1% growth.
Will the latest growth figures crack any of the determination Powell expressed in his latest statement? Prior to the release of the figures, senior Fed officials, including chairman Jerome Powell and his deputy Liel Brainard, did not rule out the idea of raising interest rates more aggressively in the near term to curb inflation that has reached 8.5% in the past month. Pointing to a slowdown in the U.S. economy will cause the Fed to soften its hawkish tone, but it’s a possibility. Economists estimate that the peak of inflation may be behind us.
Macro data still supports raising interest rates
“The decline in US GDP does not really indicate a weakening of the economy,” says Alex Zabrzynski, Meitav’s chief economist. According to him, the current economic data in the US is actually good. “Real consumer spending in the US is growing in line with the long-term trend (the trend that neutralizes the corona crisis). However, real household income continues to erode and threaten continued growth in private consumption.”
Zabrzynski estimates that this macro data supports raising interest rates this week by 0.5% as expected, despite the slowdown in growth. “This rise in interest rates is already reflected in the markets. The contracts embody that the Fed will raise interest rates in its next 4 meetings until September by a cumulative 2% from the current level (0.5%).”
At the same time, the US labor cost index (ECI) jumped 1.4% in the first quarter compared to the same quarter last year. Modi Shafrir, Chief Financial Officer at Bank Hapoalim, notes that On the part of wages in the U.S. “and a fact that supports a sharp rise in interest rates.”