It could also be read in the latest Fed minutes, but in the Fed there are more and more officials who already say it quite clearly – they do not plan to lower the interest rate anytime soon, as far as they are concerned – not in 2023 at least. It is true that the process of raising the interest rate is probably already coming to an end, but that does not mean that the interest rate will start to decrease immediately afterwards. The market now predicts a probability of more than 90% that at the upcoming Fed meeting, on February 1, the central bank will raise interest rates by 0.25% ‘only’ to a range of 4.5%-4.75% (after several consecutive increases of 0.75%, the Fed slowed The pace for an increase of 0.5% and now a further slowdown is expected).
According to the Fed’s deputy chairman, Liel Brainard, “the Fed will not give up its commitment to continue to lower inflation – we are determined to stay on course” and added that the interest rate should remain high. These are similar things to what other members of the central bank said, and this is because it is true that inflation is on the decline but is still at very high levels.
“Even with the recent moderation, inflation remains high, and policy will need to be restrictive enough for some time to make sure inflation returns to 2 percent on a sustained basis,” she said in a speech in Chicago. “This will allow us to assess additional data as we move the policy interest rate closer to a sufficiently restrictive level, taking into account the risks surrounding our dual mandate objectives” (maintaining price stability and the labor market).
Where, after all, does it already detect a drop in inflation?
Despite this, Brainard pointed to several areas where she sees inflation starting to decline: she sees weaker numbers in retail sales as well as wage growth, and expressed doubt that the economy will enter an inflationary spiral, as in the 1970s, when inflation fueled wage growth which in turn fueled the Inflation and these led again to wage increases and so on,
“Together, the price trends in core goods and non-housing services, the tentative indications of some wage slowdown, the evidence of entrenched expectations and the possibility of margin compression may provide some confidence that we are not currently experiencing a 1970s-style wage-price spiral,” Brainard said.
According to the Fed’s preferred index – the prices of personal consumption expenditures excluding food and energy – inflation has been at an annual rate of 3.1% for the past three months, well below the 12-month rate of 4.5%. Granted, that’s still much faster than the Fed’s 2% target, but it reflects improvement.
Commercial real estate in the US is already on the decline, and rental prices are also rising, but the Fed and other economists estimate that this will calm down later this year, when leases will join the trend in commercial real estate. Housing costs remain high, but Brainard and other Fed officials expect them to ease later This year when the leases of the apartments will follow the decline in commercial real estate. Recent consumer surveys also show that while inflation expectations remain high in the near term, they are stable in the longer term.
Meanwhile, the Fed, as I remember, expected the interest rate to reach 5.1%, but the market expects a stop earlier, about a quarter of a percent less. The market is also expecting a drop in interest rates during the coming year, but as mentioned – the Fed thinks this is too optimistic a forecast. Brainard, of course, provided no indication of such a possible drop in interest rates.
And what about in Europe?
“It is certain that the European Central Bank will not stop after one more increase of 50 basis points at its next rate-setting meeting,” said European Central Bank member Claas Knott, who is also the governor of the Dutch central bank. According to him, “the market is not pricing the interest rate hikes correctly.” He expects at least two more interest rate hikes because “what we have seen so far are not data that encourage us”.
“We’ve seen one more inflation reading where there were no signs of easing underlying inflationary pressures. So we have to do what we have to do, and core inflation still hasn’t changed direction in the eurozone and that means the market developments, say in the last two weeks, are not entirely welcome from my point of view. I I don’t think they are compatible with the goal of returning inflation towards 2%,” Knott said.
The European Central Bank (ECB) raised the interest rate four times during the year 2022, and the interest rate there is already at 2.5% (the interest rate on deposits is at 2%). The bank also anticipates a continued increase in interest rates in the coming year to slow down inflation on the continent, which stands at 9.2%, far from the 2% target of course.