| Dr. Gil Michael Bafman, Chief Economist, Bank Leumi
The Fed interest rate went up yesterday. During the past year, the interest rate in the USA increased by 450 basis points.
The current increase, at a moderate rate compared to previous measures, is intended to allow the Open Markets Committee to continue to examine the effects of the measures so far. In the background to the interest rate decision, there are indicators that point to relatively moderate growth in the US, but with a rate that remains low. Also, employment costs continue to rise at a relatively fast pace.
The weakness of growth is particularly noticeable in interest-sensitive industries, and in particular in the residential real estate industry. Fed Chairman Jerome foresees a slowdown in growth and a weakening of the labor market, but estimates that it is possible to continue to reduce inflation gradually, without harming the economy too badly. He estimates that the growth of the American economy will be positive in 2023.
Inflation in the US has weakened, but its level is still relatively high – and the Fed is alert to the inflation risks that still remain. Also, the drop in inflation is not extensive enough, and it is necessary for the drop to reach the services component, which has a major weight in the private consumption basket.
Expectations have fallen, but this is not enough to stop the rate hike, and the chairman of the Fed emphasizes the need for a rapid reduction of actual inflation to the inflation target level.
The chairman emphasized the dangers of changing the policy back to a less restrictive level prematurely, apparently, while not reducing the interest rate in 2023. For him, the fear of a too moderate course of interest rate increases and the failure of inflation to fall to the target in a permanent way outweighs the fear of excessive reduction .
Therefore, the Fed still expects further increases in interest rates – apparently, two more steps of 25 basis points each. This, in order to return inflation to 2% over time.
Also, the chairman emphasized the period of time it takes for the monetary policy to have an effect, and in this there is another hint of the intention to maintain the interest rate at a relatively high level over time.
The chairman of the Fed also referred to the easing of financial conditions, also against the background of the positive trends in the financial markets recently. The chairman wishes to maintain tighter conditions over time, and this also through additional interest rate increases.
In addition, the Fed will continue to reduce the size of its balance sheet by reducing its holdings of mortgage-backed securities.
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the bank. They should not be considered a recommendation or a substitute for the reader’s independent judgment, or an offer or an invitation to receive offers, or advice for the purchase and/or making investments and/or any operations or transactions. The information may contain errors and changes may occur. The bank and/or subsidiaries and/or companies related to it and/or controlling owners and/or interested parties may from time to time have an interest in the information presented in the review, including financial assets presented in it.