The Fed, willing to maintain interest rates despite the resistance of the economy

Throughout his two years of battle against inflationthe Federal Reserve USA has tried to squeeze consumers enough through higher interest rates to stop them from spending, seeking to align demand with supply and push U.S. economic growth below its potential to ease price pressures.

That hasn’t happened yet.

Since the financial markets With the U.S. central bank expected to hold interest rates at the end of a two-day policy meeting on Wednesday, policymakers now have to judge whether the economy’s stronger-than-expected performance is the last gasp of the economy. consumer waste that began during the COVID-19 pandemic, or proof that monetary policy is still not tight enough to fully return inflation to the 2% target set by the Fed.

Since the last monetary policy meeting in September, in which central bankers also left rates unchanged, incoming data has shown stronger-than-expected employment growth, stronger-than-expected economic growth and only a slow moderation of inflation which, at 3.4% in September according to the Fed’s preferred indicator, remains well above the target.

There are reasons for the central bank to be, as its officials have said, “prudent” when approving new rate increases. Most notable are market-based interest rates, which have been driven higher by investors regardless of any FED action.

The returns of the Treasury bond U.S. long-term mortgage rates have soared since last summer, and the average rate on a 30-year fixed-rate mortgage has risen to about 8%, a level not seen in nearly a quarter of a century. Ultimately, Federal Reserve officials believe these developments will curb spending by businesses and households.

However, in recent weeks it has not been very clear when this will happen, as the expected falls in hiring, housing inflation, spending on services and other key data have been postponed by an economy that does not give up. .

Even rising bond yields, cited by some senior Fed officials as a substitute for the central bank’s own rate hikes, may simply be a recognition of the economy’s strength and an implicit signal that the Fed can have to do more to end the fight against inflation.

“We believe real rates are higher due to strong US growth,” analysts at Citi ahead of this week’s Fed meeting. “If we are right, the Fed risks falling behind the real growth and inflation curve,” even if the economy slows from the torrid 4.9% annual pace recorded in the third quarter.

Consumers still like

The US central bank will publish its latest monetary policy decision at 1800 GMT. The president of the Fed, Jerome Powellwill hold a press conference half an hour later.

Investors consider it almost certain that the central bank will keep its benchmark overnight interest rate within the range of 5.25%-5.50% set at its July meeting, and the odds also lean against further hikes in the future.

Since no updated economic or rate projections will be released at this meeting, attention will focus on whether the new monetary policy decision or Powell’s comments appear to tilt in favor or against further hikes.

At the September meeting, those responsible for the Fed They said they still thought an additional rate hike would be necessary. If anything, data since then has likely left that door open.

Gross domestic product growth in the third quarter was the best example of the risks the Fed is trying to discern, as pandemic-era savings combined with a low unemployment rate and continued healthy wage increases , allowed consumers to continue driving strong economic growth.

That offset concerns that events such as renewed student loan payments and weakening consumer confidence would cause a setback.

Instead, consumer-oriented companies like McDonald’s and Amazon have reported earnings that have surpassed analysts’ average estimates, while home prices have continued to rise despite high mortgage rates.

Since pandemic-era programs pumped trillions of dollars into household bank accounts, economists have tried to reach agreement on when those extra savings would run out.

After last week the Government of USA After the surprising economic growth data for the third quarter was released, some analysts reconsidered the issue and suggested that there was still perhaps a trillion dollars left to fuel consumption and, potentially, higher prices.

“Given consumer resistance, the short-term risk may be a more accentuated use of savings”wrote Nancy Vanden Houten, chief US economist at Oxford Economics. “There is a lot of talk about the so-called ‘revenge spending’. (…) There may be more room to spend”he said, referring to the increase in spending that has occurred during the recovery from the pandemic.

Spending has continued to grow despite consumer confidence levels, which, according to the Conference Board, have fallen to recession levels amid a host of concerns.

“Consumers have continued to be concerned about rising prices in general and grocery and gasoline prices in particular.”Dana Peterson, chief economist at the Conference Board, said Tuesday after the business group reported that its index of consumer expectations for October remained below a level that has typically signaled the arrival of a recession.

“Consumers also expressed concern about the political situation and rising interest rates. Concern about war/conflict also increased, amid recent turmoil in middle East”.

All of that has also been on the Fed’s mind.

Powell has said in recent months that he believes the Fed’s monetary policy is generally working “as expected,” with higher borrowing costs and tighter financial conditions eventually slowing the economy, but with the timing perhaps slowed by the persistent effects of the pandemic such as increased savings and a deep mismatch between supply and demand, particularly for labor.

In other words, what is underway may be a slow and progressive adjustment towards the 2% inflation target, something that the Federal Reserve I would not want to rush it if the alternative is a large increase in unemployment and an unnecessary recession.

But Powell has also said that growth must slow, and if it doesn’t, the Fed’s official interest rate will have to rise.

“It’s good that the economy is strong. It is good that the economy has been able to withstand the tightening that we have applied. “It’s good that the labor market is strong,” Powell said in his press conference after the Sept. 19-20 meeting. But “If the economy turns out to be stronger than expected, that just means we will have to do more in terms of monetary policy to get back to 2%. Because we will return to 2%.”