The American central bank refused to panic and raised interest rates by another 25 basis points. It was, however, an attempt to end the year in a dovish tone, or the Fed in a new macro-prognosis with only one rate hike (to the level of 5.0-5.25%). And that is a big change compared to the situation two weeks ago, when there was speculation about (Fed) rates at 6% due to high inflation.
Of course, the dovish turn outside the Fed was not just a matter of course, but was motivated by tension in the American banking system. This is also acknowledged by the FOMC’s comment, which mentions the threat of tighter standards, which could result in a slowdown in economic activity and (in the end) inflation. As Fed director Jerome Powell stated in a press release, fears of a slowdown in activity and domestic demand led the US central bank to even consider that they will not raise rates this session.
On the other hand, Powell warned that everything about the dream of annual rates – with him, an aggressive move towards dollar imports – are not in line with what the Fed thinks. Similarly, Powell repeated several times that the head of the Fed did not conduct a debate about the policy of quantitative tightening, which significantly reduces the volume of free (banking) reserves in the system and, in fact, in the current situation, should add fuel to the fire.
Overall, the Fed’s last message could be summed up as follows: let’s raise rates for the year at least a little, let’s wait and see if the financial tension eases, or not.
The uncertainty facing the American central bank is really big. It is evident that financial turbulence will not simply disappear from the American system.
The proof will be that at the same time that Powell was speaking at the press conference, the US Treasury Secretary Yellen issued a statement that she was not considering the introduction of a 100 percent fixed deposit. This may not be good at first for a number of small American financial houses, and the financial crisis will start again. What will follow will be a significant tightening of the conditions, which Powell had quite justified concerns about in the press.
