Chief Economist on the Fed’s interest rate track: – It’s almost like that, I don’t think so. This is far beyond expectations

Chief Economist on the Fed’s interest rate track: – It’s almost like that, I don’t think so.  This is far beyond expectations

On Wednesday evening, the Federal Reserve and Jerome Powell reached a new interest rate decision.

The US central bank did as expected – kept interest rates unchanged.

Regarding the decision, on the other hand, most of the tension was related to the signals the Fed would give about the future:

The “dots” overview was also released on Wednesday, as part of a series of updated economic forecasts from the Federal Reserve.

Dot charts tell what the members of the Federal Reserve’s interest rate committee think about the level of interest rates in the future. Prior to the meeting, this outlook was expected to point in the direction of one rate hike for the year.

The bottom line is that the Fed’s interest rate committee envisions it two The interest rate increases even this year. This surprises Harald Magnus Andreassen, chief economist at Sparebank 1 Markets.

– I almost can’t believe it. He says that this is much higher than the expectations in the money market, and what people believed beforehand.

He himself believed in only one increase this year, in the order of 0.25 percentage points.

- Harald Magnus Andreessen, chief economist at Sparebank 1 Markets, says the argument is that after you raise interest rates so much, you can take the time to look at the effects.

– Harald Magnus Andreessen, chief economist at Sparebank 1 Markets, says the argument is that after you raise interest rates so much, you can take the time to look at the effects. (Photo: Fredrik Solstad)

– That was hardcore

In earlier point charts – in March – Fed rate committee members thought on average the interest rate level of 5.1 per cent at the end of 2023. This has now been revised upwards to 5.6 per cent.

Three of the members expect the interest rate to rise to six percent.

Reasons for upward adjustment? Andreessen mentions three factors: New Fed estimates point to a stronger economy, lower unemployment, and a slight uptick in core inflation compared to the previous fork.

– That was hardcore, he says.

Kit Juckes, chief global currency analyst at Société Générale, goes further, calling him a “super hawk” for Bloomberg.

It had to move the market.

For now, there are no major market reactions to speak of, other than that the probability of a July rate hike is getting bigger.

– It is usually not the press release that moves the market but rather the press conference. Andreessen says the raster charts here should do just that.

It hasn’t been many days since I thought the last rate hike had taken place, he adds.

Immediately after the decision, the dollar strengthened marginally against both the euro and the Norwegian krone.

The US stock market spreads with relatively small results in both directions towards the stock market close, while the interest rate on ten-year US government bonds rose significantly in the minutes after the interest rate announcement.

However, this was down earlier in the day, around zero percent change from yesterday at 21.40.

Interest rate hike in July

Fed Chair Powell himself said during the press conference that the approach now is to take rate hikes somewhat slower in terms of speed when the Fed approaches the target, i.e., the peak interest rate.

“It’s about the fact that it’s more important what level of interest rate you’re going to get to, not how fast you’re going to get there,” comments Stein Brun, chief economist at Arctic Securities to DN.

When asked what was on the papers for the July meeting, Powell replied that this came up in the discussions leading up to tonight’s interest rate decision, but it was not a topic.

Powell referred to it as a “face-to-face meeting”.

“For those of us who read Powell the way a certain man reads the Bible, this sounds like we’re heading for a rate hike in July,” says Brun.

Of course, given the current situation. He explained that there would be quite a few numbers before that time.

The dot plot also shows that members of the interest rate committee believe the interest rate is ultimately a full percentage point lower than it was at the end of 2023, thus at the level of 4.6 percent.

This is higher than the March estimate.

Far from matching an inflation rate of 2%.

When DN calls Andreessen again, after he’s bought himself some sushi and popped into the office, he says the US central bank still has a big inflation problem.

This is despite the fact that many people are talking about the possibility of triple-digit headline inflation in July, because energy prices rose sharply in the US in the months leading up to July last year.

– The problem of inflation will not decrease for this reason. Lower inflation increases disposable income, Andreessen says, and that fuels demand and pressure in the economy.

– It is remarkable that many people do not talk about the growth of wages and costs for companies. Either companies have to feast on margins and then have analyst estimates for next year completely wrong, or they have to pass it on to the consumer. This raises consumer prices, Andreessen reasons.

The latest labor market reports point to average wage growth of around five percent.

– What is more important is the growth of wages in relation to the growth of productivity. This is a problem in the USA, EU, Norway and Sweden. When wage growth rises more than productivity growth, costs per unit produced increase. That’s down from the peak, but it’s far from consistent with 2 percent inflation over time, Andreessen says.

Arctic’s Stein Bruun notes that a majority of the Fed’s interest rate committee members reported risks to the upside in their estimates of the so-called PCE deflator, otherwise known as the Fed’s preferred inflation target.

Estimates have been revised upward from an average of 3.6 percent to 3.9 percent for the fourth quarter of this year, precisely because inflation has not fallen in the same downward trend in recent months.

Prices will rise again in July

Before the May inflation numbers were released on Tuesday of this week, the market had a roughly 30% chance of a rate hike. This dropped to seven percent after the inflation figures.

It should also be noted that before the decision was made on Wednesday, market interest rates determined the possibility of a new interest rate hike at the next meeting at the end of July.

In the run-up to tonight’s rate meeting, the Fed has raised interest rates on every occasion since March 2022. The Fed’s interest rate range before the rate meeting was 5.0-5.25 percent.

– We have come a long way, but the full impact of the tightening is not yet clear, Powell outlined.

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