Most expectations are that the Fed will raise interest rates by a quarter of a percentage point, so that rates exceed 5%, with the pressure that this puts on growth rates.
Recent economic data in the United States for the month of March reflected relatively positive indicators, in terms of a continued slowdown in inflation rates, as well as labor market data, regarding the drop in the unemployment rate and the added 236,000 new jobs (although these reflect low growth rates in this context).
The Fed has raised interest rates by 475 basis points, in nine increases in one year since March 2022, as part of its fight against inflation, which last year registered levels not seen since the crisis. global finance.
A state of uncertainty imposes itself on the orientations of the monetary policy; Between the two options of stopping the pace of monetary tightening (in light of the recent interest rate decision reflects plans to stop tightening policy, according to analysis by bank adviser Diane Swonk) or to increase the rate of interest rates in line with the process initiated last year.
The banking crisis last March presented the US Federal Reserve with vast challenges, particularly in light of the additional credit restrictions imposed by this crisis.
Markets are dominated by widespread fears and a state of uncertainty, in light of the banking crisis and its aftermath, at a time when the US economy recorded below-expected growth in the first quarter of this year.
inflation rate
Professor of Economics at Columbia University, winner of the Nobel Prize in Economics in 2006, Edmund Phelps, says in an exclusive statement to “Economy Sky News Arabia”:
It seems that the Fed wants to raise interest rates until the inflation rate reaches 2 or 3%. I am not convinced that such a “political” approach is worth the trouble.
Inflation rates in the United States continued to slow during March, supported by lower energy prices, as estimates indicate that this slowdown will not prevent the United States Federal Reserve from raising its interest rate in its next decision.
According to data from the Personal Consumption Expenditure (PCE) Price Index, inflation levels hit 4.2% in March (a relatively large drop from February’s rate of 5.1%), which is the “lowest level in two years”. Core inflation (which does not include food and energy prices) fell to 4.6% in one year, from 4.7% the previous month.
As inflation rates slow as mentioned, the US economist speaks in a related context of “the legacy of inflation”, which in his view is represented in the fact that it has affected the erosion of wages in the face of rising prices due to inflation, and he expresses it by saying: Inflation has left wages apart.
In just one month, price inflation in the United States has slowed to 0.1%, in line with analysts’ expectations, according to the personal consumption expenditure index, which the Federal Reserve relies on. The same indicators point to an increase in household income of 0.4%, while expenditure rates remained stable.
Slow the pace of interest rate hikes
Michael Parkin, Professor of Economics at Western University, points out in statements exclusive to “Sky News Arabia Economy” that: Based on US inflation data, “I think the Federal Reserve will temporarily halt policy. .. it’s likely to stop raising interest rates at the same time.
He referred to concerns expressed by many analysts that a “credit crunch” may be looming on the horizon, following the recent banking crisis in March, which sparked a state of uncertainty in the sector, and the magnitude of this impact. on the decisions of the Federal Reserve, explaining that a credit crisis in this way would be like a “surprise”, but the biggest surprise is whether the US Federal Reserve is preparing the interest rate to face this risk NOW.
On March 22, the Federal Reserve approved the “ninth consecutive hike” in interest rates since last year, as part of its policy to contain inflation, which in 2022 reached its highest level since around 4 decades, before gradually slowing down. At its last meeting, the US Federal Reserve raised its key rates by 25 basis points, in line with expectations. Interest ranged between 4.75 and 5%, the highest level since September 2007, ie before the global financial crisis. The Federal Reserve announced – after its last meeting – that it could take more decisions to tighten its monetary policy, stressing that inflation is still high, indicating that it is not yet finished raising interest rates. interest despite the risk of an exacerbation of the banking crisis that is ravaging world markets.
aggressive monetary policy
Economics professor at Williams College, Kenneth Kuttner, says in statements exclusive to “Economy Sky News Arabia”:
I think we are facing a turning point in terms of the US Federal Reserve’s policies on raising interest rates. As everyone knows, the Fed raised the fed funds rate very sharply, to a range of 4.75% to 5%, with another rate hike of a quarter of a percentage point likely.
“The question now is whether this will be enough?” adds the professor of economics, stressing that it is very difficult to know. Due to a number of factors; The most important of these is that there are different ways to measure the “intensity” of monetary policy and that it is too early to fully distinguish the effects of last year’s interest rate hikes.
The Fed is likely to raise interest rates another quarter of a percentage point at the new meeting, then take a wait-and-see stance for a while, hoping that will be enough for a gradual decline in l inflation, while does not cause recession.
The Williams College economics professor says “that’s a reasonable expectation”, but in the area of monetary policy “things rarely go to plan”, as he put it.
The Federal Reserve’s expectations indicate that the inflation rate this year will be slightly higher than that forecast in December, at 3.6% against 3.5%, when it expected a fall in GDP of 0, 4% versus 0.5%.
different future scenarios
Economics professor at Canada’s Wilfrid Laurier University, David Johnson, believes the following scenarios for the next stage are not entirely clear, and he says in statements to the “Sky News Arabia” website:
The level of interest rates should be kept high to reduce demand. Thus, “families who have debts have to pay more interest on their debts, and they can then buy less of other things”. But whether they (the monetary policy makers) will continue to raise rates after that or not while the trend is towards lower inflation is unclear.
Federal Reserve policymakers expect interest rates to end 2023 at around 5.1%, unchanged from their median estimate in the latest round of projections last December.
However, they raised their expectations for next year, bringing the average interest rate at the end of 2024 to 4.3% from 4.1% in the previous forecast.
employment indicators
For his part, University of Southern California professor Jonathan Aronson identifies in an exclusive statement to “Sky News Arabia Economy” the fundamental factors driving monetary policy trends, saying “Federal policymakers are obsessed by inflation and interest ratesest rates more than employment indicators”, emphasizing that they “want at all costs to avoid a repetition of the interest rate hikes of the end of the 1970s”.
Official data indicates that the US economy added 236,000 new jobs last March, slightly above expectations of 230,000 jobs, but at the same time it is down from the rates of the past two months. Last January, the labor market in the United States added 472,000 jobs. In February, it added 326,000 jobs. The unemployment rate in the United States fell to 3.5% (according to data from the Department of Labor), contrary to analysts’ expectations that it would remain at the level of 3.6% last February.
At the same time, Aronson points to the consequences of the policy of raising interest rates in this way, and the subsequent pressures on the banking sector, pointing out that “when interest rates have risen, the value of the bonds of the Long-term treasure has been destroyed”.
“Regional banks that held these supposedly safe investments were vulnerable to the threat of a banking collapse,” he continues.
The rate hike and forecasts announced by the US Federal Reserve indicate that it remains firmly focused on bringing inflation down to its 2% target, indicating that it still views price inflation as a plus. greater threat to growth than the banking turmoil.
At the same time, it signals confidence that the economy and financial system are still in good enough shape to withstand a series of banking meltdowns that began in March and sparked widespread fears of a domino effect on d other banks.
In March, industrial production rose 0.4%, after rising 0.2% in February, according to revised data.
The dilemma of central banks
In General, Professor Emeritus of the Department of Economics at the University of Ottawa, Mario Cicarichia, speaks in exclusive statements on the website “Sky News Arabia Economy” on the fundamental dilemma facing the US Federal Reserve and central banks, saying:
The problem is that central banks usually tend to fight inflation by raising interest rates, i.e. they focus on fighting the last war (with the disintegration of economies) . If inflation continues to slow, as it appears to be currently, the biggest issue for monetary policy will be how to sustain growth when inflation is low. Unfortunately, central banks are not well equipped to do this. But central banks can pull the string (ie by slowing growth).
And the professor emeritus of the Department of Economics at the University of Ottawa discusses the expected financial policies in light of this, saying, “I think we’re heading into recession, and in light of the policy thinking adopted during the next year (..)”.
The US economy grew less than expected in the first quarter of this year. This growth, analysts say, will prompt the US Federal Reserve to “calm the pace of interest rate hikes in the period ahead.” On Thursday, data from the US Commerce Department showed growth of 1.1% in the first quarter of 2023, when growth was expected to reach 2%.
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