The Fed follows the course it had set in previous meetings. The US central bank has announced a rate hike of 75 basis points, to the level of 3%-3.25%, the third consecutive rise at this pace. The measure was approved unanimously.
The Fed has taken this measure after a summer in which the financial institution had stepped on the accelerator in its relentless fight against inflation. Only in the meetings of June and July taking interest rates to the range of 2.25%-2.5%. Following this new decision by the Federal Reserve, rates have reached the level of 3%-3.25%, the maximum of January 2008.
With this movement, Jerome Powell and the directors of the Fed have opted to maintain a constant course, with a rise that the market was already discounting. The US central bank has preferred to keep its promises rather than scare traders with a 100-point spike, assuming that the economy is already heading in the right direction and that all you have to do is continue along the path already set.
In addition, the members of the Fed have lowered their forecasts for the growth of the US economy and what was a clear advance has now turned into a very slight increase. The US GDP, whose previous forecasts pointed to a rise of between 1.4% and 2%, is now between 0.2% and 0.3%.
For 2023 and 2024 they have also taken out the scissors regarding the provisions. Next year there are forecasts for GDP growth of between 1% and 1.4%. For the following course there would be an increase of between 1.4% and 1.8%.
Regarding inflation, the Federal Reserve expects it to close 2022 between 5 and 6% while in 2023 it would still exceed 3%. Regarding subsequent years, the inflation target would still not be met, since in 2024 it would be around 2% but still exceeding it, while in 2025 it would be on the verge of this target.
As of today, inflation has already begun to cool down in August thanks to the hikes by the Fed and the correction in oil and fuel prices. However, the rate of rise in prices continues to be very far from the 2% target set by the central bank, year-on-year.
In that sense, Powell has left no room for doubt that his priority is to lower inflation, even if he has to pay a toll to bring it back under control. In that “reducing inflation is likely to require a sustained period of below-trend growth” and he noted that rate hikes “will bring some pain to American households and businesses.”
Returning to the increases, in the last meeting it opened the door to hope for the markets with the forecast that it could be resorting to ‘flash hikes’ to bring rates quickly to a range of 3% or higher and, in the final months of the year, temporize to avoid damage to the economy in the event of a drastic drop in inflation. At the July meeting he made it clear that “our idea is to bring rates to an area between 3% and 3.5% by the end of the year”, an area where it is already.
There was a 76% chance that the Fed would resort to a further hike of 75 basis points
Regarding the measure undertaken at the last meeting, Powell has met market expectations. According to Bloomberg futures, there was a 76% chance the Fed would resort to a further 75 basis point hike, a scenario mainstream Wall Street analysts had subscribed to.
James McCann, chief economist at Abrdn, was betting on this increase and warned that “further increases until the fourth quarter and until 2023 will cause the Fed funds interest rate to reach a maximum slightly above 4%, a little by below market prices. Therefore, the expert defends that “at these levels, the policy will be restrictive enough to trigger the necessary recession to control inflation” and concludes by alleging that if inflation does not drop from now on “the Fed will have “We have to take a stronger stance. That’s why we continue to see upside risks in our rate forecast, with the fed funds rate peaking around 5%.”
Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM commented that “everything points to the Fed announcing a new rate hike of 75 basis points” and notes that “there is a high probability that it will have to act in a big way again in November. What’s more, his new projections “should indicate that the fight against inflation will be more painful than anticipated.”
“Market-expected rate cuts in 2023 are fading in favor of a permanently high Fed rate of around 4.25%”
Axel Botte, global market strategist at Ostrum AM (affiliated manager of Natixis IM) also believed that the increase would be 75 points, but was open to it reaching 100 points, surprising everyone. In any case, Botte warned that “the rate cuts expected by the market in 2023 are fading in favor of a permanently high level of Fed rates around 4.25%”.
Lastly, Paolo Zanghieri, Senior Economist at Generali Investments openly spoke of the fact that, although there is now a 75-point rise, the coming months will be more relaxed. “We expect a somewhat slower pace of tightening, with an increase of 50 basis points in November and a final hike of 25 basis points in December, with risks tilted to the upside. The Fed will then keep the official interest rate at 4% ( top end) through early 2024.”
In any case, it remains to be seen how inflation reacts to the Fed’s measures. Its movement in the final stretch of the year will be the key to see if the Fed remains in ‘Hawkish’ mode and continues to raise rates or if it will be able to temporize to keep up with the economy and avoid a recession increasingly likely for analysts, such as Bank of America, who give it a 40% chance by 2023.
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