Full stop or full stop? The Federal Reserve has halted the biggest monetary policy tightening in four decades by leaving interest rates intact today at its meeting of the Open Market Committee, which directs monetary policy. The official rates continue, thus, in the range of 6%-5.25%, where they remained in May, after ten consecutive increases in little more than two years, from a starting point of 0%-0.25%. The decision was approved unanimously, which means that US monetary policy makers have no doubts about its expediency at this time.
The question now is whether the bullish cycle has definitively ended or whether the Fed has taken a breather to analyze the situation. The market reacted with volatility to a decision that was less clear than expected, maintaining the possibility of increases in July. Thus, the futures went from giving a 60% possibility to a rise next month to 70%. Equities lurched, and after a day in which Apple had close to three trillion dollars in capitalization and the manufacturer of microprocessors necessary for artificial intelligence Nvidia the trillion, it was subjected to a slide of ups and downs in its two last session hours.
In the statement that followed the decision, the central bank explains that “maintaining rates in this range allows the [Open Market] Committee to assess additional information and its implications for monetary policy.” It is especially important, according to the statement, to analyze the delay with which monetary policy decisions are transferred to the market – which is usually between three and six months – and which affects both economic activity and inflation and the financial sector.
And there the Federal Reserve itself does not seem to have things so clear. In the economic projections for the rest of the year, several of the Committee members expect rates to be half a point above their current level in December. The central bank continues to insist that its objective is to reduce inflation to 2% – although unofficially it could accept 2.5% – and it is not clear that this will be achieved at current interest rates.
However, in the short term, the US economy is going to suffer a severe credit crunch that will probably mean that at the next monetary policy meeting, at the end of July, the Federal Reserve will not raise interest rates again either. The reason is the debate on the debt ceiling, which ended a week and a half ago, when the Joe Biden government and the Republican opposition reached an agreement to raise the country’s debt level.
The US had been close to default since January, which means that most of the treasury debt issues in that period have not occurred. That means that now the Department of the Treasury must issue around 850,000 million dollars (785,000 million euros) of Treasury bonds. That will reduce the liquidity of the deepest market in the world – that of US government bonds – which in turn will mean less money circulating in the economy as a whole. Also, to attract enough buyers, the Treasury may need to offer higher yields than the 4.74% and 3.82% it was offering yesterday for two-year and 10-year bonds, respectively. Private debt usually takes public debt as a reference, so that a rise in the latter’s rates could affect the former.
Another factor that may also influence the Fed is the persistently low oil price, despite Saudi Arabia’s desperate attempts to raise it, even at the cost of unilateral cuts in crude production. This is another element that seems to continue, largely due to the weakness of the world economy and, especially, of China, which is the largest consumer of hydrocarbons in the world.
It also helps the moderation of rates that the general price index has slowed its rise to 4% in May, with core inflation -which excludes fresh food and energy- at 3.5%. And finally, there is the tightening of conditions for banks to grant credit after the collapse of several regional credit institutions in April and May, which has generated a wave of caution in the financial market.
However, there are also factors that indicate that further rate hikes are on the table. The most obvious is that the US economy continues to generate jobs, and the possibility of a recession this year or next has been virtually ruled out by investors. Added to this is the fact that no one knows whether the aforementioned massive debt issuance will have an effect and, if so, whether it will last. Finally, the Federal Reserve’s preferred indicator for measuring prices – the personal consumption expenditures index – rose in April, which could suggest that upward price pressures continue.
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