The Fed slowed down – Newspaper Kommersant No. 233 (7434) of 12/15/2022

Following the results of the December meeting, the US Federal Reserve System (FRS) slowed down the rate of increase of the key rate to 0.5 percentage points, setting it at the level of 4.25-4.5% per annum. Earlier, the regulator raised the rate by 0.75 points four times. Such a slowdown does not mean preparations for the end of the rate hike – the scatter chart suggests its increase next year to a level of 5-5.25%. The macro forecast updated following the meeting indicates expectations of weak growth in the US economy next year as well.

The Open Market Committee of the US Federal Reserve raised the key rate again. This time – by 0.5 percentage points (pp), up to 4.25-4.5%. Prior to this, the regulator raised the rate by 0.75 percentage points four times (in June, July, September and November), in May the rate was raised by 0.5 percentage points. about the beginning of the reduction in the volume of assets on the balance sheet of the regulator.

The December 14 meeting statement reiterated that current US numbers point to “modest growth” in consumption and production, while unemployment remains low. 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 once again noted that “Russia’s invasion of Ukraine and related events create additional pressure on inflation and on global economic activity.”

Fed Chairman Jerome Powell announced at the end of the meeting that quick rate decisions were important at the beginning of the year, but now the rate of increase is not so important. According to him, decisions on rates will be made at each specific meeting, depending on the incoming data.

The adjusted scatter chart with the forecasts of the committee members now assumes a rate increase in 2023 to 5-5.25%. In 2024, the rate is expected to decrease to the current level.

The regulator retained the wording that “further rate hikes are warranted” and that tightening is necessary to achieve a “sufficiently restrictive” monetary policy that would bring inflation back to the 2% target over time.

In the new macro forecast, US GDP growth this year is raised from 0.2% to 0.5%. In the third quarter, this figure on an annualized basis (that is, if it changed at the same pace throughout the year) increased by 2.6%, in annual terms, the growth was 1.8%. The following year, the estimate, on the contrary, was sharply reduced – from 1.2% to 0.5%. The US economy, as expected by the Fed, will be able to return to higher growth rates only in 2024 (1.6%).

Inflation in the US, meanwhile, slowed down to 7.1% in November, having increased by only 0.1% over the month (in October and September, the increase was 0.4%).

The increase in food prices for the year amounted to 10.6%, for energy – 13.1%. The growth of the index of consumer spending, which focuses on the Fed, in October also slowed down from 6.3% to 6%. The Fed’s updated forecast assumes prices will increase by 5.6% this year instead of 5.4%, next year by 3.1% instead of 2.8%. Unemployment is expected to be 3.7% this year but accelerate to 4.6% next.

Higher rates are already affecting consumer demand, Capital Economics points out. They note that prices for basic goods in November fell by 0.5% due to a decrease in the cost of used cars by 2.9%, the deflationary trend also affected electronics and household goods. Given the normalization of supply chains, this trend may continue next year, in December inflation will show an additional decline, the center believes. Freedom Finance Global Leading Analyst Natalia Milchakova does not rule out that at the next meeting the rate may be raised by only 0.25 percentage points, as the Fed is already ready to “back down” in the process of raising the rate, but is not yet ready to take big risks, warning that inflation is still high.

Tatyana Edovina