2023-06-14 20:05:57
The Federal Reserve of the United States (Fed, for its acronym in English) has decided this Wednesday put a pause on its aggressive rate hike campaign and keep it at 5.25%. “The Committee seeks to achieve maximum employment and inflation at a rate of 2% in the long term. In support of these objectives, the Committee decided to maintain the target range for rates between 5% and 5.25%,” says the US central bank. However, the president of the Fed, Jerome Powell, acknowledged on Wednesday that the Committee of the regulatory body could consider more increases in interest rates this year, so the pause announced today could only be temporary. “Looking ahead, almost all Committee participants consider it likely that some additional rate increases are appropriate this year to bring inflation toward the 2% target” the agency is targeting, he told a news conference.
“Recent indicators suggest that economic activity has continued to expand at a moderate pace. Job creation has been strong in recent months and the unemployment rate has remained low. Inflation remains high,” the Fed explains in a statement. “The US banking system is strong and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. The Committee remains closely vigilant to inflation risks,” he says.
The members of the Federal Open Market Committee of the US Federal Reserve had started a meeting on Tuesday to decide if the ten rate hikes carried out in the last year are enough or if it was necessary to continue raising them. While on previous occasions the increases were expected by most analysts, this time there was no consensus on what was going to happen.
inflation drop
Although the uncertainty surrounding the meeting was the majority sentiment among economists, this Tuesday a piece of information was released that could have finally tipped the balance towards pausing the rises: the year-on-year inflation rate fell considerably in May, nine tenths, to stand at 4%, its lowest level since March 2021. This is the second steepest drop in the consumer price index since it started to decline eleven months ago, although the figure is still far from the Fed’s 2% target.
For this reason, most experts estimate that the ceiling that interest rates can reach has not yet been reached and that there will be more increases this year, although They see a temporary pause possible in this June meeting and a possible new rise in July.
According to Federated Hermes senior fixed income portfolio manager Orla Garvey, the Fed is expected to announce a pause tomorrow and resume rate hikes in July and September. “Our view is that we are nearing the end of the current hike cycles and while further hikes are possible, the larger and far-reaching question is how long central banks will stay at their terminal level and , subsequently, when and to what extent they will be cut,” he said in a statement.
Highest level since 2007
After ten consecutive increases, beginning in March 2022, the rate was between 5% and 5.25%, the highest level since mid-2007. The last increase, of a quarter of a point, was announced on May 3. As learned after the publication of the minutes of the meeting, the participants mostly expressed uncertainty about the appropriateness of further tightening monetary policy.
Some members of the Fed’s Federal Open Market Committee (FOMC) were in favor of continuing with the increases due to the slow rate at which inflation is falling in the country. Other members of the body, however, considered that “it would not be necessary” to further restrict monetary policy if the economy continues to move in the direction of their estimates.
According to the technical team that prepares the central bank’s projections, the US economy will slow down over the next two quarters and could enter a slight recession at the end of 2023, before picking up pace and beginning to recover.
In a survey of economists by the Financial Times and the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, experts also forecast at least two more quarter-year interest rate hikes. point this year. Thus, of the 42 economists surveyed between June 5 and 7, 67% predicted that the rate will reach a maximum of between 5.5 and 6% this year.
The Russian invasion of Ukraine, the trigger
Faced with runaway inflation as a result of the pandemic and Russia’s war against Ukraine, the Fed began raising rates on March 17, 2022. It did so with 25 basis points and rose 50 more in May. Then he started to step on the gas and made four 75 basis point climbs. In December it rose half a point and this year it began to slow down with three increases of 25 basis points.
The rumors of a relaxation of the rhythm became more present after the uncertainty unleashed in the banking system by the bankruptcy of Silicon Valley Bank (SVB) and Signature Bank and the bailout of First Republic Bank. Although the causes of the bankruptcy are extensive, the investigation into what happened suggests that its financial situation worsened due to the Fed’s monetary policy. Despite the fear that the crisis could spread for the moment, it has not happened, after the rapid reaction of the US authorities.
#puts #brakes #year #rate #hikes #leaves