Saturday, May 27, 2023

The rate hikes by the US Federal Reserve are far from over

Minutes from the last US Federal Reserve monetary policy meeting, held at the beginning of the month, show there was near-unanimous support for interest rate hikes to be cut to 0.25 percent, below the 0. 5 percent in December and from the four previous increases of 0.75 percent each.

The decision helped spark a rally in the stock market as the Federal Reserve may be nearing the end of its current interest rate cycle. But the minutes show there was also support for a larger increase, noting “participants who favored a 50 basis point increase” said it would “bring the target range closer more quickly to levels where they believed they would have an adequate firm position”.

Federal Reserve Chairman Jerome Powell. [AP Photo/Susan Walsh]

The minutes also state that ‘several participants noted that a political stance that was not sufficiently restrictive could slow down recent progress in moderating inflationary pressures’.

Those voices could be getting louder, as in the three weeks since the last Fed meeting, the economic and financial landscape has changed somewhat and there are signs that the rate hike at the next meeting, scheduled for May 21-22, may be lifted.

Two Fed chairmen, who were not eligible to vote in the most recent decision, have indicated they would have supported a higher hike.

Cleveland Fed president Loretta Mester said the Fed was not limited to quarter-point increases. “We can go faster, and we can [aumentos] parent at a particular meeting,” Mester said.

San Luis Fed President James Bullard favored moving to a base rate of 5.4% as soon as possible, while the current rate is between 4.5% and 4.75%. “I don’t see much interest in delaying our approach to that level,” he told reporters at the beginning of the month.

The Federal Reserve’s tightening monetary policy, enforced in the name of fighting inflation, is primarily aimed at suppressing wage demands and what the Federal Reserve continually refers to as the “tight” labor market.

Labor market data for January showed the unemployment rate had fallen to 3.5%, the lowest level in 53 years, against expectations, while inflation slowed, but not as much as expected.

The main issue in determining future interest rate decisions will not be price trends, but the labor market, as, as the Wall Street Journal noted, Federal Reserve Chairman Jerome Powell “has justified continued rate hikes, pointing to still tight labor markets, high wage pressures and high inflation in labour-intensive services’.

On Tuesday, Wall Street reacted strongly to the increased likelihood that interest rate hikes will not stop.

US stock indices had their worst day of the year: the Dow fell nearly 700 points, down 2.1%, the S&P 500 down 2% and the NASDAQ, with a strong technology component, down 2.5%. The S&P 500 is down 4% from its year high.

The fixed income market followed the same trend, with 10-year Treasury yields rising back to 4% after falling in the first weeks of the year.

According to a market strategist quoted by the Financial Times, the reason for the sell-off was a reassessment of the Federal Reserve’s trajectory “and the sharp rise in government bond yields,” with the upward movement in yields bolstering sentiment. stay tighter for longer.

At about 3.95 percent, government bond yields are at their highest level since early November, with two-year bond yields rising to 4.73 percent, close to the level they reached in November, the highest since 2007.

The expectation of further rate hikes is already being reflected in the wider economy. The median interest rate on a 30-year mortgage, which was 4 percent a year ago, reached 7 percent in November and fell to 6 percent earlier this month. Now it is starting to rise again.

While the US Federal Reserve plays the leading role in setting global financial conditions, its policies are part of a combined offensive by major central banks against the working class in conditions of the highest inflation in four decades, leading to significant reductions in the real wages. .

The President of the European Central Bank (ECB), Christine Lagarde, was the one who most clearly set out the goals of this regime in her statements on Tuesday. The ECB is preparing for another rate hike at its next meeting.

The financial markets expect the key ECB interest rate to reach 3.75% in September, up from the current 2.5%. It would be the highest level since 2001, when the ECB tried to fix the value of the newly created euro.

(Originally published in English on February 23, 2023)

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World Nation News Desk
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