On Wednesday evening, the results of the Fed meeting were published.
As a result of the meeting, the Fed increased the interest rate by 0.75 percentage points, to 3-3.25%, as expected. The decision was unanimous. An increment of 0.75 p.p. observed following the results of the third meeting in a row. The Fed will continue to tighten monetary policy.
The Fed continues to reduce assets on the balance sheet. The process was launched on June 1, now the balance is $8.8 trillion. The March high is $8.9 trillion. Rolling up the balance occurs by refusing to reinvest funds received from expired securities. Later, it is possible to start selling US government bonds and mortgage-backed securities from the balance sheet.
Explanatory note
The Fed leadership noted a moderate weakening in spending and production. The situation on the labor market is positive. Inflationary pressures are relevant and have become wider.
Inflation remains elevated. There is an imbalance in supply and demand caused by the pandemic, rising prices for food and energy. There is more extensive price pressure. Events in Europe create an additional impact on inflation and put pressure on global economic activity, according to a press release from the regulator.
Consumer prices in August fell from 8.5% to 8.3% per annum. The main drivers are high energy and food prices (including the consequences of events in Ukraine and the seasonal effect). Gasoline prices increased by 25.6%, oil – by 68.8%, natural gas – by 33%. Food prices rose by 11.4%. The unemployment rate remained at the level of 3.6%, employment in the private sector (non-farm payrolls) increased by 315 thousand compared to 526 thousand in July.
The Open Market Committee (FOMC) aims to achieve maximum employment and 2% inflation over the long term. The FOMC expects that after an adequate tightening of monetary policy, inflation will return to the target level of 2%, and the labor market will remain strong.
Risks to the economic outlook remain. The regulator will monitor the incoming information and is ready to adjust the monetary policy and approach to it in accordance with new data. The FOMC will take into account a wide range of information. It includes data from health care and labor market conditions.
FOMC Digital Forecast
Open Market Committee Digital Forecast for GDP 2022-24 was worsened, in terms of inflation and the key rate – increased.
In 2022, US GDP may grow by 0.2%, in 2023 by 1.2%, in 2024 by 1.7%. In June, the dynamics was estimated at 1.7%, 1.7% and 1.9%. Unemployment rates are estimated at 3.8%, 4.4% and 4.4% (increased). The inflation forecast was improved from 5.2% to 5.4%, from 2.6% to 2.8%, from 2.2% to 2.3%.
The key rate may be 4.4% / 4.6% / 3.9%. The long-term forecast is 2.5%.
Jerome Powell speech
During a press conference, the head of the Fed said that the regulator is seriously focused on reducing inflation to a level of 2% and has the tools to do so. Price stability is the responsibility of the Fed. An increase in interest rates in the future is necessary.
According to Powell, at some point it will be justified to raise the fed funds rate at a less significant pace. This will depend on the incoming economic data. The Fed wants to see hard evidence that inflation is cooling down. At some point, rates may drop.
The Fed has not yet made a decision on the size of the increase in the cost of lending at the next meeting. Activity in the residential real estate market has significantly weakened, while the situation in the labor market remains very tense. Price pressure remains throughout the economy, the risks of rising inflation still persist.
Implications for markets
The reaction of the US stock market to the results of the meeting is negative. By 23:05 Moscow time, the S&P 500 index fell by 1.5%, the euro weakened against the dollar (-1.2%), the yield on 10-year US government bonds fell to 3.5% per annum.
The statements of the regulator as a whole are moderately negative, however, the words of Jerome Powell make it possible to assume the possibility of growth of risky assets in October. Local risks for the US stock market are relevant.
According to the derivatives segment (service CME FedWatch), with a probability of 59%, the key rate will be increased to 4.25-4.5% by the end of the year. The next FOMC digital forecast for interest rates and economic indicators will be released in December.
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