Sometimes you have to stop not because you have reached your destination, but to see the path traveled and determine where and how to continue. That is what the United States Federal Reserve this Wednesday, when first time in the last 11 meetings of its Federal Open Market Committee has put interest rate hikes on hold with what during 15 months has been fighting the inflationleaving the price of money in the range of between 5 and 5.25%.
With that decision, which was widely anticipated by analysts and to which the Fed itself had opened the door at its May meeting , the US central bank takes a break in what has been the most aggressive pace of rate hikes since the 1980s. But it may is nothing more than a temporary standstilla short break to study how monetary policy is impacting and affecting the real economy, since the effects of increases are not immediate. Because in fact, in a move that has caught many by surprise, the Fed has suggested that there could be two more increases this yearand not just one as many had anticipated.
Two more possible increases in 2023
In its quarterly economic forecast update, updated for the first time since March, the Fed now calculates end the year with rates at 5.6%, instead of the 5.1% expected in March. Assuming the raises are made in quarter-point increments, that would mean two more raises in the remaining meetings before the end of 2023. The next one is on July 25 and 26.
“Almost all committee members hope it will be appropriate to raise interest rates a little more by the end of the year but in this meetingconsidering how far and how fast we have moved, we have judged prudent to keep range to allow the committee to assess additional information and its implications for monetary policy”, he later explained at a press conference Jerome Powell, Chairman of the Fed.
Powell has not guaranteed that the first of those potential raises will come at the next meeting, although he has admitted that the July conclave has been discussed at this week’s. He has insisted on his usual phrase that they will go “meeting to meeting“. But also at a time of the appearance before the media he has used the word “leap” instead of pausing to talk about this Wednesday’s decision, something that he has corrected immediately. Nor has he answered the question of what is the value of pausing and suggesting possible increases instead of going up directly (“I don’t lose weight by signing up for to the gym, I have to go”, the reporter has raised with a graphic metaphor).
Cuts not before two years
What has discarded Powell is that there may be cuts of types in no time soon. “It will be appropriate to cut when inflation is coming down really significantly and we are talking about a couple of years“, he said. “Not one person on the committee has suggested a rate cut this year, and I don’t think there’s any chance it’s going to be appropriate. The inflation hasn’t really gone down. He hasn’t reacted much to our uploadss. And we’re going to have to stay the course” (using in English an expression similar to “Keeping at it” that gave title to Paul Volcker’s memoirs).
Powell has also insisted that “Still a long way to go” in the process to try to return inflation to the 2% target that the Fed has as one of its mandates.
inflation and employment
The latest data on the inflationwhich were published this Tuesday and confirmed a brake on the rate of price increases, which went from 4.9% year-on-year in April to 4% in Mayhave undoubtedly contributed to the pause decided by the Fed. But in those same data it was seen that the underlyingonce food and fuel are removed from the calculations, prices continue to rise too fast: at 5.3% year-on-year in May, an increase of 0.4% compared to April. In all cases, in addition, it is far from target of the Fed to keep inflation at the 2%.
Also the latest data from employmentwith 339,000 jobs created in Mayhe 29th consecutive month of growthshow a strong labor market.
and the fear to which one premature stop in the rise in rates allow it to be encyst inflation, which would force even more aggressive measures.
“The economy faces headwinds by tighter credit conditions for households and businesses that will likely weigh on economic activity, hiring and inflation,” said Powell, who stressed that “the extent of these effects remains uncertain.” uncertain“.
The new forecasts
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In the quarterly economic forecasts on rates, unemployment, inflation and economic growth updated at this meeting, it is estimated that the US economic growthwhich happens to be calculated from 1% this year compared to the 0.4% forecast in March. The unemployment rate It is estimated that it will end in 2023 in the 4.1%, instead of the 4.5% expected three months ago. The prospects of inflation moderate from 3.3% interannual to 3.2%but in the case of inflation underlying they do not go down but go up: the Fed now believes that it will end 2023 at 3.9%instead of the 3.6% that he calculated in March.
Although the forecasts are often wrong, they are indicative of the Fed’s reasoning. And they have been complicated by the uncertainty on the impact and scope that adjustments in bank credit may have also had on the economy after the latest turbulence in the sector.