The United States Federal Reserve (Fed) has once again complied with the established script. The US central bank has decided raise interest rates another 25 basis points to place the reference rates in the range of between 5% and 5.25%, the highest level since mid-2007.
This has been the tenth consecutive increase in interest rates by the institution chaired by Jerome Powell, which does not give up in its efforts to return inflation to 2% despite the turmoil in the US banking sector and the prospects that the world’s leading economy will suffer a recession in the coming months.
Thus, the Fed’s Open Market Committee (FOMC) has raised interest rates 500 basis points since in March 2022 the United States monetary policy makers began to tighten financial conditions.
However, this Wednesday could have been the last rise of this cycle of increases of the reference rates, one of the most aggressive in the 109-year history of the Fed, at least if inflation does not give a scare in the coming months.
Despite the US consumer price index (CPI) moderated in March for the ninth consecutive month, to 5% in the general rate, the underlying rate -which excludes energy and fresh food from the calculation due to its high volatility- rose one tenth in annual comparison, up to 5.6%.
The rise in prices, as measured by the Personal Consumption Expenditure (PCE) price index, moderated in March to 4.2%, from 5.1% in the general annual rate. The core rate, the Fed’s favorite measure to gauge inflation, fell one tenth to 4.6%.
In this context of moderation, albeit slow, of inflation, the market discounts that, at the very least, the US central bank will pause in June in interest rate increases with the aim of gauge the effects that monetary policy tightening is having on the real economy.
(Pivoting, which is a gerund)
Already in the March meeting – after the bankruptcy of Silicon Valley Bank, Signature Bank and Silvergate Bank – the members of the FOMC modified the statement published after the meeting to say that “additional tightening of policy may be appropriate, softening the message above that “continued increases” would probably be necessary.
In the statement published this Wednesday, the Fed has made it clear that its members will “closely follow incoming information and assess the implications for monetary policy.”
Also, “in determining the extent to which additional policy tightening may be appropriate to return inflation to 2%,” the US central bank will “take into account cumulative monetary policy tightening, the lags with which monetary policy affects economic activity and inflation, and economic and financial factors”.
At this meeting, the Fed has had to deal with the fall of another entity, First Republic Bank. The bank lost almost all of its stock value last week after it released its quarterly results and revealed that its clients had withdrawn more than $100 billion in deposits during the recent banking crisis.
In the early hours of last Monday, and after a weekend of speculation, the United States regulators intervened in the entity and reached an agreement to sell most of its operations to JPMorgan for 10,600 million dollars (about 9,664 million euros). ).
While the turmoil in the financial sector on the other side of the Atlantic does not fade, the economic growth of the first world power cools down.
The gross domestic product (GDP) of the United States grew 0.3% in the first quarter of 2023 compared to the last three months of 2022. The rise was three tenths less than that registered between October and December.
In addition, the annual growth rate in these first three months of the year was 1.1%, well below the 2.6% estimated in the last quarter of 2022.
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