The Fed does not slow down – Newspaper Kommersant No. 205 (7406) of 03.11.2022

Following the results of the November meeting, the US Federal Reserve System (FRS) raised the key rate again, bringing it to the range of 3.75-4% per annum. As in previous meetings, the increment was 0.75 percentage points – this is the fourth such increase in the rate in a row. Fed chief Jerome Powell did not rule out a more significant rate hike than expected in September – then the forecast suggested its increase this year to 4.25-4.5%. Experts also expect the rate hike to continue, but at a slower pace.

The Open Market Committee of the US Federal Reserve on Wednesday again raised the key rate by another 0.75 percentage points – to the level of 3.75-4%, the same increase was observed following the results of the previous three meetings – in June, July and September (in May was increased by 0.5 p.p.). In general, the tightening of the Fed’s policy on rates began in March, in May it was announced the beginning of a reduction in the volume of assets on the regulator’s balance sheet.

A statement following the meeting noted that current indicators point to “modest growth” in consumption and production, while maintaining low unemployment. At the same time, inflation is at an elevated level due to an imbalance in supply and demand, high energy prices and other factors.

The regulator again noted that “Russia’s invasion of Ukraine and related events create additional pressure on inflation and on global economic activity.”

At the same time, while the Fed retained the wording that “further rate hikes are warranted,” the regulator added that tightening is necessary to achieve “sufficiently restrictive” monetary policy that would bring inflation back to the 2% target over time. Assessing the pace of future rate hikes, the regulator will start from an assessment of the cumulative impact of monetary tightening, as well as take into account delays in the transfer of higher rates to the real economy, inflation and the state of the economy. Jerome Powell, commenting on the outcome of the meeting, noted that the labor market “is still not balanced”, and inflation remains at a level well above the target, while he also pointed out that consumer spending growth has slowed, including due to tightening financial conditions and decrease in real incomes of the population.

Regarding future rate hikes, the head of the Fed said that they may need to increase more significantly than expected in September.

Recall, in September, the Fed sharply changed the scatter chart with the forecasts of the committee members – now it assumes an increase in the rate this year to 4.25-4.5%, the next – up to 4.5-4.75% (in June it was up to 3, 25–3.5% and 3.5–3.75%, respectively). At the same time, the macroeconomic forecast for the US economy was significantly revised: the expected GDP growth this year was reduced from 1.7% to 0.2%, next year – from 1.7% to 1.2%. According to the results of the second quarter, the indicator decreased by 0.6% on an annualized basis (that is, if the indicator changed at the same pace throughout the year) after a decline of 1.6% in the first. In the third quarter, the growth rate turned out to be higher than expected: the economy grew by 2.6% year on year, but this growth was provided primarily by an increase in exports and a positive contribution of foreign trade to GDP growth (2.8 p.p.), while domestic demand showed weakening.

Meanwhile, consumer inflation in the US, meanwhile, slowed down in September to its lowest level in the last seven months and amounted to 8.2% against 8.3% in August (the indicator began to decline in July, from a record 9.1% to 8.5%) . At the same time, core inflation (excluding food and energy prices) accelerated to 6.6% in September from 6.3% in August. Food prices rose by 11.2%, energy – by 19.8%.

The consumer price index, which is calculated with a delay and which the Fed is guided by, remained at the level of 6.2% in August, while core inflation accelerated from 5.9% to 6.1%. Over the month, the growth remained the same – by 0.3% for the main indicator and by 0.5% for the base one. The Fed’s current forecast assumes prices will rise 5.4% this year and 2.8% next year. Unemployment is expected to rise to 3.8% this year and 4.4% next year (previously the Fed forecast 3.7% and 3.9%). In September, unemployment remained at the level of 3.5%, 263 thousand jobs were created during the month (in August – 315 thousand).

Experts expect the Fed to continue tightening its own policy at the meeting in December, but at a slower pace.

Capital Economics predicts that the increase will be 50 basis points (and even 25 bp in January) while the Fed estimates the effect of the rate hike by almost 4 p.p. The center also expects that the slowdown in global growth will have a negative the impact on exports, and the increase in rates – on domestic demand, so they do not exclude the entry of the economy into recession next year. However, according to experts, even with negative GDP dynamics, the decline will not last long.

“The tone of the press release was not as hawkish as the pessimists expected,” said Natalya Milchakova, lead analyst at Freedom Finance Global. The expert expects the tightening cycle to end after reaching the rate level of 4.5-4.75%. Oksana Kholodenko, Head of Analytics and Promotion at BCS Mir Investments, on the contrary, points out that Fed Chairman Jerome Powell sees the final level of the key rate higher than the September estimate of 4.6%.

Tatyana Edovina