Fed will start tightening monetary policy in near future
2023.03.08 09:01
Fed will start tightening monetary policy in near future
By Tiffany Smith
Budrigannews.com – On Tuesday, Federal Reserve Chair Jerome Powell hinted at important aspects of the upcoming rate-setting meeting: A half-point increase is possible, and the most recent projections made by policymakers in December are likely to show a high point for rates above 5.1%.
Data on the economy that have been made public since the Fed’s most recent meeting, which took place from January 31 to February. 1, has consistently surprised to the upside, indicating that the 4.5 percentage points of rate hikes since March 2022 haven’t slowed the economy enough to keep inflation under control.
Powell stated, “The data doesn’t suggest to me that we’ve tightened up too much; in fact, it suggests that we still have work to do.” It’s hard to argue that we’ve gone too far. It indicates that we must continue to tighten.”
Between now and the meeting of the Federal Open Market Committee on March 21 and 22, which is responsible for setting interest rates, a number of important reports, starting with employment data due this week, will determine just how high and quickly Powell and his colleagues are willing to go.
Powell stated to the Senate Banking panel on Tuesday, “We have two or three more very important data releases to analyze before the time of the FOMC meeting.” On Wednesday, he is scheduled to testify before the House Financial Services Committee.
He stated, “Those are going to be very important in the assessment we have of this relatively recent data,” noting that the Fed would be prepared to accelerate its rate-hike pace if the “totality” of the data warrants it.
Tim Duy of SGH Macro Advisors stated that the remarks as a whole lay the groundwork for the Fed to continue raising rates until they reach 6%, triggering a recession along the way.
Duy asserted, “Powell didn’t open the door to a 50-basis-point rate hike without intending to follow through with that result at the March FOMC meeting.” Currently, that outcome can only be prevented by surprisingly weak data.”
The current range for the Fed’s policy rate is between 4.50% and 4.75%.
Between now and March 21, when policymakers deliver their rate decision in Washington, here are some things to keep an eye out for:
A gain of over half a million jobs in January was reported in the most recent monthly report from the U.S. Labor Department, which was released just a few days after the Fed implemented its smallest rate hike in a year. However, concerns regarding the impact on inflation were lessened by a slowdown in the growth of hourly wages.
Although economists anticipate a significant slowdown in the number of jobs added in February, they also anticipate a return to the 4.8% increase in average hourly earnings seen in December. That’s a lot higher than the 3.5 percent wage growth that Fed policymakers frequently cite as being in line with their 2% inflation target.
On Tuesday, Powell stated that if inflation is to decrease, the labor market must soften. In addition, he stated that he does not anticipate a rise in the unemployment rate significantly exceeding the one percentage point that the Fed anticipated in December during this round of rate increases.
The unemployment rate, which was 3.4% in January, is expected to rise to 3.5% in the report, according to economists.
It is anticipated that the most widely followed indicator of inflation in the United States, the consumer price index, will show a slight slowdown in price pressures, decreasing to a 0.4% month-over-month increase in February from a 0.5% increase in January.
In any case, that is a great deal higher than the Fed’s objective, which, according to analysts, calls for an average monthly CPI gain of less than 0.2 percent.
The strength of services that are not related to housing, which make up slightly more than half of the inflation index, will receive particular attention from analysts. Even though goods inflation has decreased, that has remained high.
Although preliminary estimates remain, economists anticipate that retail sales, which exceeded expectations by 3% in January, will moderate to 0.2 percent in February. The Fed may not consider a certain level of retail sales to be sufficiently cool. The U.S. economy is made up of two-thirds of consumer spending. The goal of the Fed’s rate hikes is to slow down consumer and business spending and demand.
The University of Michigan’s unexpectedly high reading on longer-term consumer inflation expectations in June prompted the first of four 75-basis-point rate hikes, turning what had been a more restrained period of tightening into the most aggressive rate-hike campaign since the 1980s.
The survey, which will be released the Friday prior to the Fed meeting, may once more be crucial. The most recent reading showed that one-year inflation expectations rose to 4.2%, up from 3.9% in January. On the other hand, the five-year inflation outlook remained at the bottom of the narrow 2.9-3.1% range that has been in place for 18 of the last 19 months. Along with market-based expectations, Powell and his coworkers are keeping a close eye on those.
According to Powell on Tuesday, individuals and businesses “will come to expect high inflation, and that will make it more self-perpetuating” if inflation continues.
