USA: The Fed’s race against inflation continues

USA: The Fed’s race against inflation continues

Federal Reserve He does not hide his intentions: She emphasized that she will continue her bullish policy until inflation is controlled. Thus, markets are advised to anticipate more credit crunch, especially if economic data confirms continued price jitters at a later time. The Federal Open Market Committee, the operational arm of the Federal Reserve, on September 21 raised interest rates by 75 basis points, moving the range to 3-3.25%, a record high since 2008. The most hawkish number the Fed has taken in fighting inflation is underlined in two ways: This was the fifth straight increase, and most importantly, the third in a row, reaching 75 basis points. A measure starting from 25 basis points, the level to which it was reduced in March 2020 (after the outbreak of the epidemic), which was set only last March.

Dot Plot: Rates over 4% by the end of the year

The upward path in the cost of US money will remain, as inflation has proven surprisingly difficult (although it eased in August to 8.3% from 8.5% in July) and despite signs of an impending recession. The Fed itself revised its forecast for US GDP growth significantly downward: to +0.2% for this year (from the 1.7% indicated last June), to +1.2% for the following year (from +1.7% from the previous estimate). ), to +1.7% for 2024 (number adjusted from +1.9%) and +1.8% for 2025. Market attention, rightly, is focusing on A kind of statistical graphthe chart that records the expectations of the Fed’s member bankers on a quarterly basis. According to the latest update, US rates are expected to reach 4.4% by the end of this year (June estimated at 3.4%) and by the end of 2023 are expected to reach 4.6%.

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Mixed messages from the economy don’t help with forecasting

But what can markets expect after the Fed shock in September? According to Bellerina Orochi, US Economist at T. Rowe Price, The problem is that the data gives conflicting messages. While inflation is still going on and the labor market is overheating, on the other hand, there is a slowdown in growth and a sharp correction of the real estate market. The economist acknowledges that it is very uncertain to predict what will happen next. The year 2023 assumes three scenarios. In the first, central, the final price remains close to 4% in 2023, and the US economy is still in equilibrium. Growth slows significantly below the potential level (1.5%-2%), inflation is declining and unemployment is rising by no more than one point from current levels. This scenario would be consistent with a final rate of 4% plus or minus 25 basis points.

Worst case scenario, rates 5% in 2023

The second is a scenario contemplating further tightening, with the rate rising to 5% in 2023. The key is that inflation continues and the job market is very rigid. So, even with growth well below potential, the Fed should continue to tighten. This can happen particularly if high wage inflation takes hold and companies can continue to pass on increased cost to consumers. This means an increase of at least 100 bits per second compared to the central scenario. Finally, a downturn scenario, as the Federal Reserve cuts interest rates in 2023. The US enters a recession in early 2023The unemployment rate is rising by more than one point and inflation is slowing dramatically thanks to supply chains and declining demand – a clear message to the Federal Reserve that it has overestimated it. This means a decrease of about 100-200 bps compared to the central scenario.

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