The US central bank sharply adjusts the course of interest rates in an expected dormant economic winter. The interest rate range changed from June to September this year from 3.38 to 4.25 percent this year, and correspondingly from 3.78 to 4.59 percent for 2023.
– The press conference clearly showed that the Fed intends to continue raising interest rates for some time and that they assume that they will have to rise well in the restricted area (ie above 2.5%) before they imagine that inflation will fall, says Knut A. Magnussen, Senior Economists at DNB Markets.
Magnussen says this is mainly due to the fact that the labor market has remained very tight and has not shown any clear signs of abating.
– Perhaps the markets will have to take into account that the interest rate will be able to stay high for a longer period than what has been so far within expectations. And that the Fed won’t start cutting even if growth becomes weak, and even if unemployment starts to rise, he says.
We haven’t seen it in modern times
Anders Johansen, chief strategist at Danske Bank, says we have to go back to the early 1980s for something similar, even if circumstances were different back then.
The market may be nervous because there have been such big changes in expectations in recent months and because inflation is still very high. The fact that the Federal Reserve raised the interest rate by 0.75 percent for the third time in a row, is not seen in modern times.
Johansen says the rate hike was not a huge surprise, but expectations have changed.
The fact that they imagine this could end with an interest rate of 4.6 percent at the end of 2023 shows a significant turnaround from early this summer. The changes are the biggest for next year. From being an economy that is growing according to the trend, they now say that growth in 2022 is close to zero. That is, the United States is now very close to a recession.
The only thing left is the labor market, which is still abnormally tight, we have to believe the economists. With the next interest rate meeting looming, Johansen says it’s the aggregate numbers that matter.
– Inflation figures will be important and the numbers of the new unemployed. If the latter goes up, it will indicate that they got what they wanted. Inflation is high and the labor market is tight, so unemployment must rise. If they succeed, it’s a positive that interest rates shouldn’t go up as much, he says.
He also says it will also be important to keep an eye on the companies’ quarterly numbers, which are expected to scrutinize soon.
Will companies come up with worse numbers? FedEx announced last week that it envisages a global recession and profits that are much lower than previously thought. Fedex is a leading indicator. Will there be more profit warnings? It will matter what companies say in the future. Johansen asks when will weak growth and higher costs translate into lower profits.
Exactly on time
As expected, the Federal Reserve raised its key interest rate by 75 basis points at tonight’s meeting. The central bank indicates further increases, and the “dot graph” indicates that the interest rate at the next turn of the year will be 4.4 percent, 1.25 percentage points higher. Magnussen, chief economist at DNB Markets at the end of next year, estimates the interest rate at 4.6 percent, before dropping significantly in 2024 and 2025.
As expected, the Federal Reserve raised interest rates by 0.75 percentage points. “Up front, there was little chance of it going to increase by one percentage point,” says Danske Bank’s Johansen.
Markets have already priced in a 0.75 percentage point rate increase from the Federal Reserve on Wednesday evening Norwegian time. But there was still a small amount of uncertainty in the markets as to whether the so-called hawks at the Federal Reserve would win out with a jump in interest rates of up to 1 percentage point.
The US key interest rate is the most important interest rate in the global economy, and it also influences the stock markets. Leading US stock market indices have been hovering around a 0.5 percent gain throughout the afternoon and evening, but promptly eased back to 0.5 percent after the rate announcement.
But after absorbing the interest rate decisions for half an hour, the US stock exchanges rose significantly, but in very tense trading.
Interest rates will continue to rise
The vast majority of experts are clear that the interest rate will rise further after the fall in order to control inflation, a tight labor market, and strong wage growth.
– Magnussen says future interest rate hikes will remain largely controlled by data, especially the development of inflation, referring to key statistical figures from the economy.
They continued to cut the balance by $95 billion as previously announced, Johansen said.
He says future GDP forecasts in 2022 will be revised from 1.7 to 0.2 percent, and inflation from 5.2 percent to 5.4 percent. In contrast, they expect GDP growth in 2023 of 1.2 percent compared to the previous 1.7 percent. They also expect unemployment in 2023 to reach 4.4 percent, compared to 4.1 percent previously.
The key US interest rate before Wednesday’s rate decision was at 2.5 percent, up from a record low of 0.25 percent just a few months ago. In the last two interest rate meetings before Wednesday’s meeting, the Federal Reserve raised interest rates by 0.75 percentage points.
In economic jargon, an interest rate increase or decrease of 0.25 percent is often considered normal, so 0.5 percentage point becomes a “double” and 0.75 a “triple.”(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.
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