The Fed in the recently concluded FOMC meeting left the policy rate unchanged. This is the second time in succession that the Fed has left the rates on hold. This is an indication of the policy rates reaching more or less the peak levels, and any further up-moves may be small in relation to the hikes effected so far.
The Fed’s reading of the economy is quite positive. The FOMC statement reads like this: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” The economic activity remains robust, but the Fed is not oblivious of the fact that over sometime the impact of the monetary tightening will start to show up in the economic variables. The Fed statement says, “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”
While the Fed will continue to target 2% inflation level, the need for any further rate hikes will be dependent on the cumulative impact of the tightening done so far, the time lags with which monetary policy affects economic activity and inflation etc. The quantitative tightening through reduction in the treasury securities will continue. Only if tangible risks emerge which could stand in the way of the attainment of the inflation target, the Fed may review the stance of the policy.
In the press conference, shortly after the close of the FOMC meeting the Fed Chairman indicated the following:
a)
Strong Economic Growth: Recent number suggest that economic activity is expanding at a strong pace, and well above the earlier expectations. In Q3, real GDP is estimated to have risen at an “outsized” annual rate of 4.9%, mainly supported by a rise in consumer spending.
b)
Labour Market: The labour market continues to be tight. But the latest supply-demand conditions indicate a better balance. The payroll gains in the last three months is an average of 266,000 per month. This is strong growth, but a lesser pace compared to the earlier periods. The unemployment rate is low at 3.38%. Wage growth too shows some signs of easing.
c)
Inflation Still High: Inflation has moderated but it is still above the longer-run goal of 2.00%. CPI is at 3.40% as per Sept numbers. Core inflation is at 3.70%. We need to see inflation coming down consistently towards the target level.
While the option of rate hikes in the US remains potent, the likelihood of rates moving much higher from the current levels looks less probable. But the high rates may sustain for longer than expected duration as inflation needs to decline further. The estimates of inflation expectations being lower offers some solace, but for things to stabilize the geopolitical tensions too need to abate.
