The Fed is reaching a plateau

Following the results of the March meeting, the US Federal Reserve System (FRS) raised the rate by another 0.25 percentage points – to the level of 4.75-5%. At the same time, the regulator softened its rhetoric, noting only the need for a “some” increase in the rate, and the head of the Fed, Jerome Powell, directly pointed to the risks arising from bank failures in the United States. According to him, the regulator will take into account the tightening of lending conditions when assessing the need for further rate hikes.

The Open Market Committee of the US Federal Reserve at the March meeting nevertheless raised the key rate, but this time only by 0.25 percentage points – to the level of 4.75-5%. The move was expected: after the bankruptcy of Silicon Valley Bank and Signature Bank, the Fed was faced with the need to take into account the risks of increased volatility in the financial markets due to fears of new “bankcranes”.

In a statement following the meeting, the Fed explicitly stated that the tightening of credit conditions will affect households and companies and lead to a decrease in economic activity, employment and inflation, but to an “undefined” degree.

At the same time, the rhetoric of the regulator regarding the further dynamics of the rate was significantly softened: the Fed only talks about the need for “some” increase in it, and taking into account the lag with which the increase in rates affects the economy, as well as the situation in financial markets.

The scatter chart with the forecasts of the committee members, published following the meeting, as in December, assumes an increase in the rate this year to 5–5.25% and a policy reversal in 2024. The head of the Fed, Jerome Powell, said that “the events of the last two weeks will put pressure on demand and inflation,” and noted the need to strengthen supervision and regulation in the banking sector. In assessing the need for a new rate hike, the Fed will primarily consider tightening credit conditions, but this year’s rate cut “is not in line with the base case.”

The main obstacle to the end of the current cycle of monetary tightening remains the persistence of high core inflation – February statistics only confirmed fears of a slower-than-expected price decline.

Thus, the growth of core inflation (excluding food and energy prices) in February accelerated to 0.5% (the maximum since September), while the annual rate slowed slightly – from 5.6% to 5.5%. At the same time, total consumer inflation decreased from 6.4% to 6%, month-on-month price growth amounted to 0.4%. Energy prices fell again month on month – by 0.6%, their annual growth slowed down to 5.2%. Food prices rose by 9.5%, for the month – by 0.4%. The Fed’s inflation forecast for this year was also raised, but only from 3.1% to 3.3% on a total basis and from 3.5% to 3.6% on core inflation. The estimate of the growth rate of the US economy was also reduced – from 0.5% to 0.4% of GDP.

Prior to the bankruptcy of SVB, market participants were confident that the regulator would raise rates by 50 bp. and will continue to tighten policy until a steady decline in inflation, but now opinions are divided: some experts point to the need to continue the fight against inflation, while market participants with a slight margin lay only one rate increase in May. At the same time, the OECD in the latest macro forecast notes that the pace of lending has already slowed down, and the dynamics of the money supply (M2) in the United States showed in 2022 the first decline year-on-year in the last 60 years. The strengthening of the dollar, which was observed at high rates of rate hikes, was partially won back, which reduces pressure on the exchange rates of developing countries.

“Despite the increase in the forecast for core inflation, the Fed left its forecast for the rate unchanged, which indicates a softening of the tone, while the regulator may begin to cut the rate before the end of the year if the situation in the economy is worse than the forecast,” Capital Economics believes. . Natalya Milchakova, a leading analyst at Freedom Finance Global, believes that another 0.25 percentage point rate hike is possible this year, and then a long pause until the end of the year.

Tatyana Edovina