Fed prepares to ease rate hike

The Federal Reserve (Fed) is preparing to moderate the rise in interest rates this week, economists anticipated, at a time when aggressive increases aimed at fighting inflation have an impact on the economy.

The 50 basis point (bp) increase in the rate that analysts are forecasting will continue to be a steep increase, amid efforts by the US central bank to cool demand to reduce consumer costs.

Households in the world’s largest economy grapple with red-hot prices, a situation made worse by rising food and energy costs sparked by Russia’s invasion of Ukraine since February.

To make borrowing more expensive, the Fed has raised interest rates a total of six times this year, including four 75bp hikes, to currently stand in a range of 3.75 to 4.0 percent.

“We think the stage is set for a 50bp increase this month,” said Oren Klachkin, an analyst at Oxford Economics, noting that interest rate sensitive sectors such as housing and inflation are showing signs of relaxing.

The decision will be announced after a two-day meeting of the Fed’s FOMC, which begins tomorrow.

Policymakers closely monitor wage growth, fearing that higher wages will increase inflationary pressures.

“The Fed’s main concern is really wage growth,” said Martin Wurm, an analyst at Moody’s Analytics.

“This does not necessarily mean that the benchmark rate will continue to rise forever, but it does mean that it will increase a bit and stay high through 2023,” Wurm told AFP.

signs of stress

Despite the Fed’s crackdown, US consumer inflation was 7.7% annually in October, while job creation remained strong, leaving markets nervous about the possibility that the central bank continue his aggressive campaign.

“The strong labor market, rising wages and robust household balance sheets are key areas of support for demand,” explained ING economist James Knightley.

“We are seeing increased use of consumer credit and credit cards to finance spending, indicating some signs of stress and that households’ efforts to maintain their standard of living are beginning to peter out,” Knightley said.

smaller recession

Fed Chairman Jerome Powell suggested a moderation in rate hikes in December, though he warned they may stay high for “some time.”

The timing of this easing is less significant than questions about how much more rates need to be raised and how long tightening should be maintained, he added in a speech in late November.

While many economists believe there is a 50-50 chance of a recession, this probably means a small contraction in Gross Domestic Product, according to Wurm, while rejecting a crisis like the one in 2008.