The US Federal Reserve refrained from further rate hikes

The US Federal Reserve System (FRS) on Wednesday refrained from raising rates, keeping it at 5.25–5.5%. Fed Chairman Jerome Powell said the regulator was unsure whether it had reached the necessary level of monetary tightening to combat inflation, but cited labor market dynamics that are finally showing signs of cooling and moving towards equilibrium. Market participants do not expect a rate increase at the meeting in December – and are already predicting a reversal of Fed policy in mid-2024.

On November 1, the US Federal Open Market Committee again refrained from raising the rate, keeping it at 5.25–5.5%. There is only one meeting of the regulator left before the end of the year, at which the rate could theoretically be raised – its increase was provided for in the September dot plot with forecasts of the committee members themselves (now it will be updated only in December) – but market participants no longer believe such a Fed forecast and – they are still waiting not only for the rate to remain the same, but also for it to be reduced from the middle of next year.

In a statement following the meeting, the committee noted strong economic growth in the third quarter, but also recorded a slowdown in the growth of new jobs. Unemployment remains low and inflation remains high. The American regulator also formally reserved the possibility of raising rates, promising to take into account the accumulated effect of previous increases and the lag with which they affect the economy.

Note that after the rate was increased by 0.25 percentage points in July, each subsequent meeting was accompanied by a comment from the regulator that further steps on the rate would depend on incoming data.

Fed Chairman Jerome Powell began his speech with the prospect of maintaining high rates, but again repeated the thesis about making decisions at each meeting and indicated that the regulator is not yet “sure” that tightening monetary policy is enough.

He also pointed to the balancing of the labor market – on average, 226 thousand jobs were created every month in the last quarter, this is a high figure, but it is already lower than at the beginning of the year. However, hiring growth, according to the Fed chairman, remains the main risk for accelerating price growth, although long-term inflation expectations remain firmly “anchored.” The state of the American economy does not yet justify the forecasts of its slowdown due to tight monetary policy – growth in the third quarter was higher than expected.

In annual terms, GDP increased by 4.9% – analysts expected growth of 4.7% (in the second quarter the economy grew by 2.1%). The largest contribution to the acceleration of the indicator was made by consumption – the IMF previously assessed that the high level of savings accumulated during the pandemic could hinder the impact of higher lending rates on demand. Consumption is also supported by the situation on the labor market, where low unemployment and steady growth in real wages remain. Investments at the end of the third quarter, however, also increased significantly (plus 8.4%), as did government spending (plus 4.6%).

Dollar inflation is slowing down, but slowly – the annual rate in September remained the same as in August (3.7%), while monthly price growth decreased from 0.6% to 0.4%.

Here, the main effect was exerted by energy prices, which jumped by 5.6% in August compared to July. Prices excluding volatile components (food and groceries) increased by 4.1% versus 4.3%; month-on-month growth was the same as in August. Services and rent continue to rise in price. The consumer spending deflator, which the Fed mostly focuses on, showed annual growth of 3.4% at the end of September (the same as a month earlier); excluding energy and food, price growth slowed from 3.8% to 3.7 %.

Some indicators in October nevertheless began to point to a slowdown: business activity in industry is declining faster than expected – the purchasing managers’ index, according to ISM, was at 46.7 points in October compared to 49 points in September, and the main reason for this is the fall number of new orders. And the number of new jobs created over the month, according to ADP, amounted to 113 thousand—this is noticeably less than expected. Wage growth also slowed down to 5.7%.

Chief macroeconomist of Ingosstrakh-Investments Management Company Anton Prokudin notes that the regulator’s decision will depend on incoming data; in any case, the Fed promises a long road to policy normalization. Capital Economics believes that incoming data in the coming weeks will show that the Fed does not need to further increase the rate, and the transition to lowering it could begin in the first half of 2024. Leading analyst at Freedom Finance Global Natalya Milchakova notes that the trend towards lower inflation has become common for Western countries, and the consensus of analysts considers a rate increase unlikely. Also, the Fed no longer expects a recession in the economy.

Tatiana Edovina