The Fed touched the ceiling – Kommersant

The US Federal Reserve System (FRS) following the May meeting ended on Wednesday raised the key rate by 0.25 percentage points, bringing it to 5-5.25%. This increase may be the last in the current cycle of tightening monetary policy – in its statement, the regulator abandoned the previous signal about the need for further rate hikes. At the same time, the head of the Fed, Jerome Powell, announced the readiness of the regulator to continue to seek to reduce inflation in the United States and that the rate level will be discussed at each meeting. The continuation of the Fed’s tough policy has already put pressure on commodity prices: markets fear weakening demand due to the risks of a deterioration in the global economy.

The US Federal Open Market Committee expectedly raised its key rate on Wednesday by 0.25 percentage points to a range of 5-5.25%. This is the highest since 2006. The regulator has come to the end of the rate hike cycle, which started from the near-zero level in March last year. This cycle of policy tightening was the most drastic since the 1980s.

In its statement, the Fed retained the wording that inflation is at an elevated level, and also made it clearer that the tightening of credit conditions will affect households and companies, will lead to a decrease in economic activity, employment and inflation, but to an “uncertain” degree. At the same time, the regulator abandoned the phrase about the need for “some” rate hike. Next, the Fed will take into account the cumulative effect of the increase and the lag with which it affects the economy.

Jerome Powell said following the meeting that the Fed remains committed to achieving the 2% inflation target. According to him, there is “a long road to lower inflation”, but the regulator will assess the situation at the end of each meeting.

Most market participants do not expect a further increase in the rate, the scatter chart with the forecasts of the committee members, which was published at the end of March, suggested a rate increase this year to 5–5.25% and a policy reversal only in 2024.

It should be noted that high core inflation will be an obstacle to lowering rates in the first place. Headline inflation in March slowed down to 5% in annual terms (against February, the increase was only 0.1% against 0.4% and 0.5% in the previous two months). The contribution of food prices to the growth of inflation in March turned out to be zero, energy – negative.

At the same time, core inflation increased by 0.4% over the month (main growth again fell on services and housing), while in annual terms, the figure even increased compared to February – from 5.5% to 5.6%. The Fed’s forecast calls for core inflation to fall to 3.6% this year, with the economy growing at 0.4% of GDP. While this valuation looks worse than market expectations, first-quarter data recorded an increase of 1.1% year-on-year versus an expected 2%. At the same time, the number of open vacancies in the labor market indicates signs of cooling in it – earlier, the growth of employment and wages prevented the exit from the rate hike cycle.

Investors are also afraid of increased financial risks (the closure of First Republic Bank was announced at the beginning of the week, the main part of its assets was sold to JPMorgan).

In turn, US Treasury Secretary Janet Yellen, in another letter to Congress, indicated that the agency could run out of opportunities to cover government expenses by early June if legislators do not agree to raise the national debt ceiling. According to her, the delay threatens “serious consequences” for the country’s business activity.

The outlook for the Fed’s tight monetary policy and a worsening economic situation are putting pressure on commodity prices, with Brent oil falling below $72 a barrel on Wednesday. Note that Russian oil rose in price in April, according to the RF Ministry of Finance, last month the average cost of Urals rose to $58.3 per barrel. This increase in prices occurred against the background of news about the agreements of some OPEC+ countries to further reduce production by 1.7 million b/d (including the Russian production cut by 0.5 million b/d).

Now, however, market participants fear a decrease in energy demand in the event of a deterioration in the situation in the global economy.

In particular, the April PMI in Chinese manufacturing fell to 49.2 points (a value below 50 points indicates a slowdown in activity). “If oil prices consolidate at their current relatively low levels, the ruble’s margin of safety will quickly dry up. Cheaper oil will lead to a noticeable reduction in export earnings and the inflow of foreign currency to the domestic market,” said Dmitry Babin, an expert on the stock market at BCS Mir Investments. Natalya Milchakova, a leading analyst at Freedom Finance Global, notes that the question is now important for the markets, how soon the Fed will return to lowering rates and whether this will happen as early as 2023 – according to the expert, such a scenario is possible in the event of a strong slowdown in inflation.

Tatyana Edovina