Financial conditions in US are good
2022.12.09 12:23
Financial conditions in US are good
Budrigannews.com – Even as the Federal Reserve fights against inflation that is at its highest level in 40 years, yields on corporate debt have fallen, stock prices have risen, and mortgage rates in the United States have fallen over the past six weeks or so.
However, unlike last summer, when Fed Chair Jerome Powell vigorously resisted a similar set of market movements, U.S. central bankers may be mostly okay with it this time.
Powell has signaled a half-percentage point increase in the policy rate to a range of 4.25 percent to 4.5 percent, which is expected to slow the Fed’s blistering pace of interest rate increases this year.
In an effort to raise borrowing costs to a level that would have a negative impact on economic expansion, the Federal Reserve increased interest rates by 75 basis points at each of its last four meetings.
The Fed’s recent statements that Powell and his colleagues “do not want to overtighten” and data suggesting inflation may be cooling have contributed to the recent easing of financial conditions. There is also anticipation that the Fed’s smaller rate hike in December means it is closer to ending rate hikes altogether.
Graphic: Are you going the wrong way? This is despite the fact that Powell and other policymakers have repeatedly stated that they are not finished raising rates and will not do so until they are convinced that inflation, which is currently hovering around the Fed’s preferred gauge of 2%, is on its way to achieving that goal.
Nonetheless, BNY Mellon Sonia Meskin, an economist at Investment Management, stated that “they don’t appear to me as concerned about the loosening of financial conditions” as they were during the summer, when rate hikes had just begun.
She stated, “I would expect him to reiterate that they’re going to keep policy restrictive for some time, but I don’t think he is likely to say anything beyond that, and the reason is the fact that they actually want to keep their options open.”
Powell stated late last month that the Fed will likely need to raise the policy rate “somewhat higher” than the 4.6% that policymakers anticipated in September.
This will likely be reflected in new projections released by Fed policymakers following the meeting next week, along with a prediction that the policy rate will not be cut until 2024.
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However, the Fed may be able to lean into the easing of financial conditions and stop rate hikes at a lower point than otherwise if inflation data or labor market readings come in lower than anticipated.
Or, as Powell hinted at recently and may reiterate next week, things could get worse as labor supply constraints continue to fuel higher wages and drive up inflation.
Additionally, the degree to which policy is actually stringent is unknown. Recently, researchers at the San Francisco Fed attempted to quantify the impact of the Fed’s forward guidance and balance sheet reductions. They came to the conclusion that monetary policy is currently actually tighter than the Fed funds rate suggests.
Graphic: U.S. money related arrangement more tight than it appears? This could be used to support arguments that inflation pressures will be lessened if the economy and labor markets weaken next year.
Some economists think Powell will keep stressing the dangers of not doing enough to fight inflation rather than the dangers of going too far, with a rise in unemployment being a painful but necessary part of the process.
According to Ryan Sweet of Oxford Economics, “The Fed wants financial market conditions to be tighter” because this is how the Fed slows the economy and brings down inflation, which will probably also result in an increase in unemployment. They are becoming somewhat enraged.”
In the most recent week, the average 30-year fixed rate loan for residential real estate dropped to approximately 6.3% from over 7% in October. From approximately 9.6% in mid-October, yields on the riskiest corporate debt have decreased to approximately 8.6%. Even though the Fed raised its policy rate by three-quarters of a percentage point to 3.75 percent-4% at the beginning of November, those drops still occurred.
In the meantime, unemployment has remained at a low of 3.7%, which is lower than what Fed policymakers had anticipated as the economy slowed as a result of tighter policy.
Graphic: Corporate bond yields: The fact that the Fed has already raised interest rates by nearly 4 percentage points may help explain why it is more comfortable easing financial conditions now than it was in the summer.
It anticipates that the increased costs of borrowing will have a long-term impact on the economy as a whole.
“However much they couldn’t want anything more than to not have an untimely facilitating of monetary circumstances, the expense of that in those days was significantly higher then than it is presently,” said Morgan Stanley (NYSE:) Eric Stein, Investment Management. They are much closer to their destination.”
