The US Federal Reserve raises interest rates by 0.25 points and warns that there will be new increases | Economy
The time has come to slow down. The Federal Reserve of the United States has approved this Wednesday its eighth consecutive increase in official interest rates, the first of this year, but this time it has been only 0.25 points, as expected. Already in December, the president of the central bank of the United States, Jerome Powell, decided to stop the rate of increase in the price of money with a rise of 0.5 points, after four consecutive rises of 0.75 points. In any case, the bank warns that the war against inflation is not over and there will be more rate hikes. “We have more work to do,” Powell said at the press conference.
The movement this Wednesday, the smallest rise in almost a year, leaves interest rates in the range of 4.5%-4.75%. It is the highest level since September 2007, although there is not much new in that, since the rates were already the highest in 15 years before today’s meeting.
The Fed has kept intact the wording of the key part of its statement: “The committee [de política monetaria] anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to bring inflation back to 2% over time.” Some economists had speculated that he would tone down that phrase, to open the door for a pause in rate hikes at the next meeting, but Powell prefers to keep the tough image. “We will stay the course until the job is done,” he stressed at the press conference. “We still do not have a sufficiently restrictive monetary policy”, he added.
References to the war in Ukraine and the pandemic have disappeared from the statement. In addition, there is a slight variation in the phrase that says that “when determining the scope [antes decía el ritmo] of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”. That change, “range” for “pace”, seems to indicate that any movement on the horizon will be 0.25 points, but it is not enough for now to think of a pause.
The central bank’s thesis is that the effects of the most rapid tightening of monetary policy since the 1980s have yet to be fully felt, so it makes sense to moderate the pace of rate hikes as they approach an appropriate level to lower inflation. Rate hikes make mortgages, consumer loans and investment financing more expensive. In this way, they cool down demand and with it, the economy, which reduces pressure on prices.
Powell continues to try to achieve the difficult soft landing for the US economy, that is, control inflation without actually causing a recession. This same week, the head of analysis of the International Monetary Fund (IMF), Pierre-Olivier Gourinchas, assured that there is a path to achieve it, but that it is narrow. The president of the central bank of the United States is clear that his priority is to restore price stability and he is willing to cause a recession if necessary to achieve this.
The Federal Reserve has received good news on the price side in recent months. Inflation closed 2022 at 6.5%, its lowest in more than a year, but still well above the 2% target that the central bank considers price stability. Another change in the statement acknowledges that inflation “has moderated somewhat”, but stresses that it remains high. “There is no room for complacency,” Powell insisted at the press conference. He has recognized that the disinflation process is underway, but qualifying that it has not spread to all sectors. The Fed chair has repeatedly warned that he will not let down his guard until prices are clearly under control. The job market is still very constrained, with the unemployment rate at 3.5%, the lowest in half a century and that continues to be a threat, he explained.
The president of the US central bank has also insisted that even more important than the rate of increase is the level that rates will reach and for how long they will remain high. The forecasts of the members of the Federal Reserve themselves, published in December, suggest that the rates will stand at 5.125% by the end of the year, that is, in the range of 5%-5.25%, to then drop a point in 2024 and another, in 2025, although Powell has made it clear that he will not think about rate cuts until he sees inflation approaching 2%.
Given the changing economic landscape, Powell has preferred during the last press conferences not to commit too much to the next move. He did say this Wednesday that what is being talked about is “a couple of more increases” to the point where monetary policy is quite restrictive.
The next meeting of the Federal Reserve’s monetary policy committee will be on March 21 and 22. Until then, two new inflation readings and multiple other indicators have yet to be released that will influence the final decision. The statement on Wednesday seemed to indicate that a further rise of 0.25 points was likely, but Powell has said that he will be very attentive to the data that arrives until the meeting in March and the one in May, so for the first time In a year it is not entirely certain that there will be a new rate hike at the next meeting.
Powell calls for Congress to raise debt ceiling
The president of the Federal Reserve has been asked if he would be willing to finance the Treasury in case the debt ceiling is not raised and he needed it. Jerome Powell has preferred to get out of the way: “Here there is only one way to go, and that is for Congress to raise the debt ceiling so that the United States government can pay all its obligations when due and any deviation from that path would be very “risky. Let no one assume that the Fed can protect the economy from the consequences of not acting on time. As for our relationship with the Treasury, we are its fiscal agent, and I’m going to leave it there,” he said. “It’s really Congress’s job to raise the debt ceiling. And I understand there are discussions, but they don’t involve us. We’re not involved in those discussions,” he added.
The United States federal government has reached the outstanding debt ceiling to which it is authorized by Congress. To exceed it, you need authorization from the legislature. The Treasury has started taking extraordinary measures, but that only buys a few months of time. Some unorthodox solutions have been proposed, but all of them would have contraindications. Resorting to monetary financing from the central bank is something that, apparently on Wednesday, Powell does not want to hear about.
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