September FOMC meeting: another 125 basis points this year and no recession?

September FOMC meeting: another 125 basis points this year and no recession?
September FOMC meeting: another 125 basis points this year and no recession?

A drastic remedy is needed to regain price stability. But there are concerns that its side effects will be harsher than the Fed is currently anticipating.

As expected, the Fed proceeded to another hike of 75 basis points yesterday. But the real hawkish message was conveyed in the economic forecast summary. Updated central bank views on the future course of the economy now show a willingness to raise interest rates to 4.4% for the rest of the year and keep them slightly higher. above this level (at 4.6%) until 2023. The jump made compared to the June projection of the Fed is considerable: 100 basis points more than in June. Future policy therefore seems more bellicose than before.

In addition, the easing of monetary policy tightening will take a long time. It is not until 2024 that the Fed finds that the rate cut is justified. The reason for this more aggressive stance is the persistence of inflation. The FOMC sees price stability, in the form of inflation at the 2% target, only in 2025.

Despite this hawkish message, the Fed has not lost all confidence in the economy. Growth was reduced to 0.2% this year and 1.2% next year, down from 1.7% in the previous forecast. The unemployment rate is now forecast at 4.4% in 2023 and 2024, which is also a bit worse than the 3.9% and 4.1% forecast in June, respectively. But officials are willing to accept this downgrade in order to achieve price stability. Based on the precise trajectory of growth, what the Fed imagines does not yet imply a recession. But, looking at participants’ forecasts, at least 4 out of 19 seem to question that judgment and could already see a recession. At the press conference, Fed Chairman Jerome Powell reiterated his view that labor markets remain “unbalanced” despite some slowing in growth, as job vacancies remain above average. supply of workers. These remarks are in line with his warning at Jackson Hole that the lesson of history is that premature easing of monetary policy comes at an even greater cost than keeping rates tight “for a some time” and that it will most likely take a “sustained period of below-trend growth” and some easing in labor markets to achieve this.

Overall, this meeting demonstrates once again that the Fed is ready to do what is necessary to bring inflation under control. It will slow demand by keeping rates higher for longer – even if that means growth and jobs will be lost. The current opinion of central banks remains unchanged: it will lead to a slowdown, but not a recession. We fully agree that a blunt remedy is needed to restore price stability. But we fear that its side effects will be harsher than the Fed is currently anticipating.

Bank of England – Less than the Fed or the ECB, but still strong

For the second consecutive time, the Bank of England (BoE) raised its key rate by 50 basis points to bring it to 2.25%. This shows that – as it indicated in its forecast guide – it is ready to respond with a “foresighted reaction” to inflation which remains high. Given the strong pressure on wages and a near double-digit inflation rate, this also seems necessary. At the same time, the BoE is aware that economic indicators are pointing down – the expected recession is approaching. This is probably the main reason why it has refrained from raising interest rates any further.
However, the central bank is also becoming more restrictive with its decision to start selling government bonds (“quantitative tightening”). Although the selling trajectory is quite subdued, it will nevertheless reduce liquidity.
In addition, energy price caps for households and businesses introduced by the new government have once again changed the stance of monetary policy. In the short term, they prevent the feared new explosion of inflation rates. In the medium and long term, however, they have a stimulating effect on demand and also lead to an increase in new borrowing. This is one of the reasons why the BoE will have to tighten several times in the months to come. – (Katrin Löhken, DWS)

The article is in French

Tags: September FOMC meeting basis points year recession

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