Jerome Powell was very clear: this rate stabilization is not going to last. More increases will be coming in 2023.
The American Federal Reserve stopped its 15-month-long hawkish cycle, maintaining interest rates stable in Wednesday’s meeting. American interest rates are at the 4.75-5% level, up from 0.5% in March 2022.
The decision comes one day after recent inflationary data showed a better outlook than expected. US inflation fell to 4%, a 0.9% drop, in May. Though, the Fed’s 2% target is still far away with no clear indication of when it might be reached.
Following inflationary data, the markets gave a 97% chance of rate stabilization.
There was no urgency for a rate cut, as the US economy seems exceptionally resilient to high interest rates. In particular, the US labor market keeps performing better than expectations, with 339,000 new jobs in May compared to estimates of just 195,000.
Nevertheless, the economy was also showing signs of discomfort. Earlier this year, three major banks filed for bankruptcy in 90 days, almost leading to the collapse of the US banking system. Furthermore, increasingly more businesses are failing, reaching a 13-year high in May.
"Considering how far and how fast we’ve moved, we judged it prudent to hold the target range steady," Fed Chairman Jerome Powell said following the announcement.
But his "inflation-first" philosophy has not struck the last blow.
Not a pivot
In the statement, Jerome Powell explicitly said more hikes will be announced in 2023. "Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year," he said.
Markets put the Fed’s rate target at 5.6%, meaning either two small increases or a large one.
The main reason for more cuts to follow is core inflation, an index that excludes food and energy prices. Essentially, core inflation gives a much more realistic outlook on consumer prices, taking into account less volatile products and services. Housing prices are critical for core inflation.
Despite general inflation dropping, core inflation remains stable at 5.3% year-on-year.
The Federal Reserve intends to fight core inflation as well. In fact, Jerome Powell might consider core inflation a more realistic measure of prices’ effect on the economy.
Hence why the Fed will keep raising interest rates this year. Yesterday’s stabilization gave much-needed respite to the economy but did not solve the consumer prices issue. At least not completely.
The most hawkish predictions consider a possible rate cut only in 2024 and a return to pre-Covid levels only in 2025.
New cuts might plunge the United States into a mild recession in 2023, though the stabilization gives the economy time to recover.
