The Federal Reserve has said that the current cycle of interest rate hikes may be completed soon.
Against the background of the specified statement by the American financial regulator, the Dow Jones index showed record growth. At the same time, experts note that the prospects designated at the official level regarding the implementation of interest rate-related policy have not yet created a safe environment for investors.
Last Wednesday, December 13, the Fed suspended raising interest rates for the third time in a row. The base rate on the loan continues to remain at the highest level in the last 22 years, which is more than 5%. The financial regulator also predicts three declines in this indicator next year. At the same time, the Fed does not exclude the possibility of implementing a policy of a different vector in 2024.
Fed Chairman Jerome Powell said at a press conference after the meeting of the organization he heads that the current level of interest rates is probably at its peak or approaching the corresponding figure.
The current position of the financial regulator means a sharp change in the rhetoric of last year and most of 2023, which provides for the concept of tightening monetary policy as the only possible response to the current situation in the economic environment. The Fed began implementing a strategy of aggressively raising interest rates in March 2022. The current statements of this regulator indicate that the mentioned measures have reached the limit, after which decisions will be made to ease monetary policy.
In recent months, inflation reports in the United States have provided information about a slowdown in the growth of the cost of goods and services. The situation in the labor market shows clear signs of stability. At the same time, there is currently no such rapid growth in this sphere as in the first half of 2023. These circumstances raise concerns that the Fed may continue its policy of increasing interest rates to curb the inflationary process.
At the same time, a decrease in consumer spending is currently being recorded in the United States. It should be clarified that the decline in this indicator is not catastrophic. So far, there is no reason to be anxious about this issue.
Eric Green, investment director at Penn Capital Management, says investors have yet to analyze the Fed’s favorite inflation gauge and the personal consumption expenditure index for November. According to the expert, recent reports suggest that there will be signs of price declines.
Investors positively assessed the Fed’s comments on Wednesday. Against this background, there was a sharp increase in the value of shares. The Dow Jones Industrial Average closed at a new record high. The S&P 500 index is within touching distance of an all-time high.
Euphoria, which is currently the dominant mood in the markets, does not cancel out the tasks of countering inflation that the Fed will have to cope with. The increase in the cost of goods and services is still excessive. The Fed’s 2% inflation target is still a result that is well away from current realities. The financial regulator predicts that the mentioned figure of the increase in the cost of goods and services is unlikely to be achieved before 2026.
Jerome Powell said on Wednesday that the Fed could still cut interest rates until the inflation target is fixed. He noted that waiting too long for monetary policy easing creates the risk of putting the economy into a tailspin.
Mr. Powell said that he would like to avoid repeating the mistake of the Fed under the leadership of Arthur Burns, which consisted in prematurely lowering interest rates, which provoked the need to return to tougher measures, which led to a kind of series of recessions.
Experts say that the financial regulator will not abandon aggressive monetary policy as quickly or in such a radical form as Wall Street expects. In their forecast of interest rate cuts, investors can outpace the pace of those processes that are most likely to be implemented in reality. Wall Street expects seven rate cuts in 2024.
Ken Moraif, executive director of Retirement Planners of America, says that phasing out tight monetary policy will not necessarily be a boon for the economic system. According to the expert, the Fed may begin to reduce interest rates at a time when inflation decreases to such an extent that there is no need for harsh measures. Ken Moraif also allows for a softening of the financial regulator’s policy, subject to an economic downturn.
Jerome Powell said on Wednesday that the likelihood of a recession in the United States next year still remains. At the same time, he stressed his confidence that the American economic system is not in the mentioned state.
In recent months, optimism has increased in the United States about the prospects for a soft landing in the economy. At the same time, investors are not convinced that this scenario will be realized.
Alex McGrath, investment director at NorthEnd Private Wealth, said that the Fed’s statements made on Wednesday signal that this regulator expects a perfect landing that surpasses a soft landing. He also expressed the hope that Jerome Powell’s work in the current position would be more successful compared to the results of Arthur Burns.
In November, wholesale inflation in the United States fell to 0.9% year-on-year. This result was facilitated by the fall in energy prices. The producer price index in the United States last month showed an increase of 0.9% year-on-year. In October, this figure increased by 1.2%.
Last month, the overall inflation rate in the United States was 3.1%. JPMorgan analysts noted that despite the slowdown in the growth of the cost of goods and services, consumers still face the painful impact of this process. Experts of this organization argue that the November inflation data reduce the likelihood that the Fed will soften its position on interest rates at a meeting in March next year.
JPMorgan analysts also predict that the financial regulator will begin easing monetary policy in the second half of 2024. They note that the Fed is seeking to normalize its activity strategy.
As we have reported earlier, Federal Reserve Bank of New York Recognizes Vulnerability of American Lenders.
