The Fed refrained from raising rates, but intends to monitor inflation

The US Federal Reserve System (FRS) on Wednesday refrained from raising rates, keeping it at 5.25–5.5%. The regulator still plans for another increase before the end of the year, but market participants doubt that such a scenario will be realized. Meanwhile, the Fed is more optimistic about the state of the US economy, the growth of which at the end of the year could be 2.1%, and not 1%, as previously expected.

Following the September meeting, the Federal Open Market Committee refrained from raising the rate for the second time this year, keeping it at 5.25–5.5%. In July an increase in the rate by 0.25 percentage points was accompanied by a comment that the regulator’s further steps will depend on incoming data. On Wednesday, Fed Chairman Jerome Powell said that the state of the economy, including consumer activity, exceeds expectations, and in the fight against inflation, the regulator needs to see confirmation that the level of rates is sufficiently restrictive.

In the statement following the meeting, the regulator reserved the possibility of raising the rate (as before, the accumulated effect of the increase and the lag with which it affects the economy will be taken into account), characterizing the pace of expansion of business activity as “confident” and not “moderate”. Unemployment remains low and inflation remains high. The dot plot with the forecasts of the committee members also has not changed – it includes another rate increase before the end of the year (to a level of 5.5–5.75%) and a policy reversal only in 2024. Market participants, meanwhile, do not expect a rate increase this year.

The Fed’s updated forecast calls for US inflation to fall to 3.3% this year (versus 3.2% in June) with the economy growing by 2.1%, not 1% as previously expected. The unemployment rate will also be lower than expected – 3.8% versus 4.1%. Another adjustment affected the forecast for core inflation – 3.7% versus 3.9%.

At the same time, inflation is growing again – in August in annual terms it amounted to 3.7%, over the month prices increased by 0.6% after an increase of 0.2% in July and June. Energy prices, in particular, showed an acceleration – by July the increase was 5.6% versus 0.1% in July (the annual figure still shows a decrease of 3.6%). Core inflation (excluding energy and food) amounted to 4.3% – month-on-month the figure increased by 0.3% after growing by 0.2% in July (the annual rate was then 4.7%). The main growth continues to be in services – housing rental prices over the year increased by 7.3%, transport services – by 10.3%. Note that in June annual inflation was already slowing down to 3%, in July – to 3.2%. The consumer spending deflator, which the Fed mostly focuses on, showed annual growth of 4.2% at the end of July, excluding food and energy, versus 4.1% in June (monthly growth remained at 0.2%). Unemployment increased from a minimum of 3.5% to 3.8%.

Chief macroeconomist of Ingosstrakh-Investments Management Company Anton Prokudin notes that inflation in the United States without volatile components is 5.2%, slowly declining (in July – 5.46%, in June – 5.63%). The downward trend in inflation has clearly slowed down, so the Fed cannot stop fighting it, the expert adds.

The question remains how much the rate will be reduced in 2024 – this time it is dangerous to “cut” the rate to zero and introduce quantitative easing, explains Anton Prokudin.

Leading analyst at Freedom Finance Global, Natalya Milchakova, believes that it is premature to consider that the Fed’s cycle of raising interest rates has already ended.

Predicting future trends in oil prices is problematic due to uncertainty in both demand and supply in the market, notes BCS Global Markets analyst Ronald Smith. Voluntary restrictions apply to supplies from Russia and Saudi Arabia, while shale production in the United States is declining and strategic oil reserves are being reduced, but there is no reliable data for September yet, so it cannot be ruled out that actual demand turned out to be weaker, and non-OPEC production is higher than currently estimated market, the expert notes.

Tatiana Edovina