The central bank in the USA (Federal Reserve) this evening (Wednesday) raised the interest rate by another quarter of a percent, to a range of 4.5%-4.75%, in accordance with the absolute majority of market forecasts.
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This is the first interest rate increase for 2023, but the eighth in the last 12 months. This is the lowest rate of increase since the first increase in the current cycle in March 2022. Already in December, the downshift by the Fed began when the interest rate was raised by 50 basis points, after four consecutive aggressive increases at a rate of 75 points.
The Fed’s announcement indicates that the US Central Bank still sees a need for “continuous” interest rate increases, despite the latest data that indicated a moderation in the rate of inflation. The members of the Fed’s Board of Governors stated that “the following decisions will be made according to the economic data that will be published by then, and the ongoing impact on the economy and the financial conditions”.
The announcement also stated that economic growth remains “moderate” and that the level of unemployment in the American economy remains “low”.
At the press conference after the announcement, Powell repeated his words that “We are committed to lowering the rate of inflation to 2% and will continue to monitor the effect of interest rate increases on the economy. Despite the interest rate increases, the economy is growing and the real estate market remains very tight. The unemployment rate remains at a 50-year low And the rate of wage increase is relatively high.”
He also said that “despite a certain moderation in the rate of inflation recently, the rate of inflation is still high and is evident mainly in the various service areas. There is still an excess of demand over supply in many areas and we will continue to use our tools in order to bring about an adjustment and lower the rate of inflation to 2%.”
“We have reduced the rate of interest rate increases in recent months and we will continue to monitor the data. In any case, the interest rate is expected to remain at a restraining level for a certain period in order to lower the rate of inflation. There is still a lot of work to be done,” he added.
The decision was preceded by positive macro data published at the end of last week and apparently supported the moderate rate of increase. According to the household income and expenditure report for December, a 0.2% decrease in expenditure was recorded, twice the market expectations. Also, the rate of annual change in the price index of household expenses, the Fed’s preferred index for measuring inflation, continues to slow. In all of 2022, the index rose 5%, down from 5.5% in November and about 7% in the middle of last year. Alongside this, the core index, excluding food and energy, fell from 4.7% in December to 4.4%.
Earlier, at the beginning of January, the consumer price index for the month of December was published and showed a sixth cooling in French inflation in the US. The index registered a decrease of 0.1% and moderated to an annual rate of 6.5%. The core index recorded a 0.3% increase in December, but the annual rate moderated to 5.7 %, compared to 6% in the previous month.
Last June, the American consumer price index reached its peak, with an annual rate of 9.1%, and since then it has been falling consistently every month. At the same time, despite the positive data, the target level of 2% inflation is still far away – as is the Fed’s inflation forecast for 2023, which stands at 3.1%.
Alex Zebzinski, Chief Economist at Meitav Investment House, mentions that most of the world’s central banks are downsizing, and not just the Fed. “The summary of the activity of the world’s central banks in January shows that only 11 of all banks raised interest rates compared to an average of 25 in the last four months. Not only did the number of banks raising interest rates decrease, but also the monthly rate of increase moderated from 0.5%-0.75% to about 0.25% on average. All this indicates that the cycle of interest rate hikes is coming to an end,” he estimates.
At noon today, inflation data was published in the Eurozone, where there was a pleasant surprise when the price index registered an increase in January at an annual rate of 8.5%, below the analysts’ estimates of inflation of 9%, and a decrease also compared to the reading of 9.2% in December. The almost certain expectation in the markets is for another interest rate increase of 0.5% tomorrow (Thursday), which will raise the interest rate in the Eurozone to 2.5%.