The rate of hikes by the Federal Reserve is slowing down, but not ending. Plus 50 basis points is what Jerome Powell brought to the meeting of the Federal Open Market Committee (FOMC), the operational arm of the US central bank. And the decision was unanimous. The relief given by a sharp drop in inflation in November, with the final figure at 7.1% (despite a Core still high at 6%), allows us to pull the handbrake to avoid inducing the country into a recession. Powell’s novelty is that he is following the European Central Bank (ECB) in calibrating monetary policy, which will be meeting by meeting, meeting by meeting. Analysts now see a neutral rate at 5.00-5.25%, a sign that further increases may come in the coming months. Bankers also revised their 2022 GDP forecast from +0.2% to +0.5%. The inflation figure goes from 5.4% to 5.6%.
The doors open
He said it a few weeks ago, surprising most investors. Speaking in Washington DC at an event of the Brooking Institution’s Hutchins Center on Fiscal and Monetary Policy, Powell had left the door open to a retracement of US monetary policy. Not a stop. But after the rise from 25 basis points in March, the one from 50 at the beginning of May and the three increases of 75 points each in June, July and September, with inflation going from 9.1% in July to 7.1% in November , a change of course was likely. “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far have yet to be felt,” Powell explained in late November. Noting that it would have made sense “to moderate the pace of our rate hikes as we approach the level of containment that will be sufficient to reduce inflation”. No sooner said than done.
Target 2 percent
However, the space remains open to possible recalibrations. «The FOMC expects that continued increases in the target range (of interest rates, ed.) will be appropriate to achieve a monetary policy stance tightening enough to bring inflation back to 2 percent over time», explains the commentary note to the decision. In determining the pace of future increases in the target range, the FOMC “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”. In other words, if economic conditions worsen, there will be a possible revision.
The good news is plentiful. According to François Rimeu, senior strategist of the financial boutique La Française AM, “the November figure, lower than expected, is good news for the Fed, even if it does not mean that the fight against inflation is over, given the high level of wage inflation in the US service sector. Moreover, Powell himself has signaled in recent weeks that the fight against inflation is not complete. Words echoed by President Joe Biden yesterday, commenting on the latest US price data. “Restoring price stability is likely to require maintaining a restrictive policy for some time. History strongly warns against premature easing of monetary policy. We will stay on course until the job is done,” Powell explained. Rhythm with a different path, yes, but not in a radical way.
The node of the work
Blerina Uruci, an economist focused on the US of T. Rowe Price, the Baltimore giant, also agrees. «The labor market remains very rigid; job growth surprised to the upside in November and wage growth accelerated,” Uruci explains. However, she adds, “I would interpret the November jobs report in the context of other data, both hard and soft, that suggest that growth momentum in the labor market and the broader economy will slow steadily next year.” And then there is another aspect that Powell will have to address. “The real estate market remains under stress – says Uruci – with a decline in sales, goodwill and house prices in response to the increase in mortgage rates”.
The other change of course is given by the stop, at least on paper, of the forward guidance. Namely, forward guidance to provide some sort of agenda for financial market investors. In practice, what was suggested from June to today by James Bullard, president of the St. Louis Fed. Already in Sintra, during the annual forum of the European Central Bank, the authoritative voice of Bullard had criticized Powell’s monetary policy, noting that with such volatile and uncertain markets it would have been better not to provide too precise indications to operators. Penalty, suffer a crisis of credibility in the event of downward revisions of the estimates. Not only on growth prospects, but also on the management of consumer price flare-ups, more persistent and lasting than expected at the Jackson Hole symposium in 2021, when inflation was considered by Powell as “temporary” and “transitory” . A year later, the mistakes have been admitted and the narrative shift has been precise. During the first quarter of next year it will be understood whether it was the correct move to, on the one hand, cool down prices and, on the other, reduce the impact on the domestic and global economy.