Friday, September 29, 2023

In the United States, there is no rate increase planned by the Federal Reserve, but the door remains open

Jerome Powell during a press conference in Washington on July 26, 2023 (SAUL LOEB/AFP)

The Federal Reserve could announce on Wednesday, at the end of its meeting, that it is keeping its rates at the current level, but leaving the door open to possible additional increases, with the dilemma still being to curb inflation without it faltering too much. economy.

Declining inflation, a labor shortage that is beginning to disappear, decreasing consumption: the ingredients are there for the American Central Bank to maintain its rates in the current range, from 5.25 to 5.50%.

The decision will be announced on Wednesday at 2:00 p.m. (6:00 p.m. GMT) in a press release, which will be published at the end of the Monetary Policy Committee (FOMC) meeting that began on Tuesday morning.

A surprise is unlikely, according to market participants who almost all expect rates to remain stable, as assessed by the CME Group.

Does this mean that the rate hike cycle, which began in March 2022 in the face of very high inflation, is over? Or are additional increases expected in the coming months?

The Fed should be careful not to be assertive on this issue and seems more inclined to be cautious. In fact, if markets assume the end of rates, financial conditions could become less restrictive and prices could begin to rise again.

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Ready to take on more if necessary

“The Fed’s message will be that higher key rates will remain on the table until the economy visibly slows and inflation approaches 2%,” says Steve Englander, head of U.S. macroeconomics at Standard Chartered and former economist at the Federal Reserve, in a note.

“The FOMC will be willing” to raise rates further in the future “if necessary,” he believes.

Therefore, the press conference that Fed Chairman Jerome Powell will hold shortly after the publication of the press release, at 2:30 p.m. (6:30 p.m. GMT), will be the subject of special attention.

The Federal Reserve'S Key Interest Rate
The key interest rate of the Federal Reserve (Sylvie HUSSON, Samuel BARBOSA / AFP)

As well as updated economic forecasts, in terms of GDP growth, inflation, employment and rate variation.

Since March 2022, the Federal Reserve’s main interest rate has been raised 11 times, at a very rapid pace, with the aim of curbing inflation, which was at its highest level in more than 40 years.

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This has since slowed significantly, despite a further acceleration this summer. In August it stood at 3.7% year-on-year, according to the IPC index.

The Federal Reserve favors the PCE index, which wants to return it to around 2%, and which in July was 3.3% year-on-year. August data will be published on September 29.

Student loans, strike and shutdown

The situation also appears to be gradually rebalancing in the labor market, after two years of labor shortages, which caused wages to skyrocket. The unemployment rate rose to 3.8% in August, due to an influx of new workers, which should help calm inflation.

As for consumption, the engine of US economic growth, it has been vigorous since the beginning of the Covid crisis, fueling high inflation, but it seems to be showing the first signs of weakness.

And starting in October, millions of Americans will see their purchasing power even more reduced, because they will have to start paying their student loans again, after a two and a half year pause linked to Covid.

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In addition, several dark clouds are hanging over the largest economy in the world.

Uaw Automobile Union Protest In Detroit, Michigan, September 15, 2023
UAW automotive union rally in Detroit, Michigan, September 15, 2023 (Matthew Hatcher / AFP/Archives)

Starting with the unprecedented strike started on Friday by the powerful automobile union, the UAW, between the “big three” American manufacturers, GM, Ford and Stellantis (resulting from the merger of the French PSA and the American Chrysler).

Another threat is that of a “shutdown,” a paralysis of the federal administration, if Republicans and Democrats in Congress do not agree on the government budget before the end of the month.

The Federal Reserve will meet in full this week for the first time since February, following the departure of former Vice President Lael Brainard, who left the country to lead the White House team of economic advisers.

She is replaced by Philip Jefferson, one of the governors of the Federal Reserve, while Adriana Kugler, formerly the United States representative to the World Bank, fills the vacant position of governor, becoming the first original Hispanic head of the Federal Reserve.

Times of National
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