The Fed’s Monetary Policy Committee (FOMC) meets Tuesday and Wednesday at the bank’s headquarters in Washington, United States. Prices that continue to rise too strongly, consumption that holds up, the labor market still tense: “We are almost certain that the FOMC will raise the rate range by a further 75 basis points in November”, anticipate in a note, Jonathan Millar, Chun Yao and Colin Johanson, economists for Barclays.
This would be the fourth consecutive hike of this magnitude and would push Fed rates, currently between 3.00 and 3.25%, into the 3.75 to 4.00% range. The vast majority of market participants expect such an increase, with others betting on a lower level, just half a percentage point, according to CME Group’s futures product rating. The decision will be announced Wednesday at 2pm (6pm GMT) in a press release. Then Fed Chairman Jerome Powell will hold a press conference. Since March, the Federal Reserve has already raised rates five times, first by the usual quarter point, then by half a point, and finally, three times, by three quarter point.
A slowdown could occur by the end of the year
And then ? Will rates continue to rise in December? Is there a risk of weighing too much on consumption? Several Fed officials have spoken in recent weeks of a slower pace. “The big question is whether the FOMC statement or the press conference that follows will provide signals on the likely path of policy in December,” Barclays economists note. According to them, “the tenor of the discussion (…) will probably turn at the risk of excessive tightening”.
Because, if the United States returns to growth in the third quarter, with GDP rising 2.6% after two quarters of contraction, recession threatens the year 2023. “A slower (economic) momentum in the fourth quarter would support a slower pace of rate hikes, starting in December, “said Rubeela Farooqi, chief economist at HFE. But, she adds, “the results of inflation will take precedence over any weakening of the economy”. In other words, the priority is to curb inflation. At the risk of collapsing the economy.
Inflation remained stable in September, at 6.2% over one year, according to the PCE index, favored by the Fed and released on Friday by the Commerce Department. Still far too high, however, for the taste of the Federal Reserve, which wants to reduce it to 2%. The unemployment rate remains at its lowest for half a century, at 3.5%. Across the Atlantic, the European Central Bank (ECB) is also tightening monetary policy: its key rates have just been raised by 0.75 percentage points for the second consecutive time.
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The rise in central bank key rates encourages commercial banks to raise the cost of money they lend to their customers, both private and professional, discouraging their consumption. In the United States, consumption, which accounts for two-thirds of growth, has held up to date. But the hugely popular credit cards will surely be released fewer and fewer over the next few months. Because as the savings accumulated by households during the pandemic diminish, as stock market investments become less profitable, as real estate falls in value, households will hesitate to spend generously.
Mortgage rates, which react upstream of rate hikes, have just exceeded 7% for the first time in over 20 years, for a fixed rate for over 30 years, the most common in the United States. Especially since inflation and the risks of an economic slowdown, and even recession, affect a large part of the planet. This weak growth among US trading partners, but also the strength of the dollar, should limit exports, which will weigh on US GDP.
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