The US monetary authorities are likely to shift down a gear at the coming meeting, but will continue to raise interest rates. They hope that the price pressure will ease significantly.
After the rapid rise in key interest rates in the USA, the Federal Reserve (Fed) will probably take its foot off the accelerator at the end of the year. The financial markets have adjusted to an increase of half a percentage point for today’s interest rate decision. This would increase the key rate to 4.25 to 4.50 percent. The US monetary authorities led by Fed Chairman Jerome Powell had previously raised it by 0.75 percent four times in a row to counter rampant inflation.
After signs of easing price pressures, the Fed chair now believes the time has come to slow down a bit. Investors are eagerly awaiting signals as to how high the currency watchdogs intend to drive interest rates next year. This raises the question of whether a deep recession can be averted despite the tight interest rates. Powell continues to see a path towards a more or less soft landing for the economy. This had grown by 2.9 percent in the summer, extrapolated for the year. Due to the still high inflation in the country and the sharp rise in interest rates, which are already burdening the real estate sector, the economic prospects are no longer rosy.
According to economists surveyed by Reuters, the US economy is heading for a recession in 2023, which could, however, be brief. Around 60 percent of economists expect US gross domestic product (GDP) to decline for two or more quarters in a row next year.
KfW chief economist Fritzi Köhler-Geib points out that the US central bank has already raised the key interest rate by a “proud 3.75 percentage points” this year: “The Fed must now show a fine hand as it proceeds further,” said the expert. On the one hand, the fight against inflation, which is still far too high, must be continued, on the other hand, interest rate increases always have a time lag on the real economy. There is therefore a risk that economic development will be slowed down too much: “I assume that the Fed will slowly begin to plummet at the December meeting,” said the economist.
Despite the economic risks, Powell intends to continue tightening interest rates because the Fed will have to be patient in the fight against high inflation. The Fed chairman does not rule out that the key interest rate may have to be pushed to a higher level in 2023 than previously signaled. He recently referred to the projections of the monetary watchdogs from September, in which they estimated an average interest rate of 4.6 percent for the end of 2023. This dot plot, known in technical jargon as a “dot plot”, is now being updated again. The futures markets are adjusting to the fact that the interest rate peak will only be reached at a range of 4.75 to 5.00 percent.
And in the Reuters survey of economists, a good third of those surveyed stated that they expect an even higher level. For example, Fed observer Jan Groen from the investment bank TD Securities expects that the end of the road will only be reached at 5.25 to 5.50 percent.
Commerzbank chief economist Jörg Krämer still sees good reasons for the Fed to tighten the reins. The rise in average hourly wages in November accelerated to 0.6 percent, signaling the continued risk of inflation. The expert warns that other wage measures could also be higher again: “That speaks in favor of further US interest rate hikes, as does the economy, which is still cooling off only slightly.”
DWS economist Christian Scherrmann advises investors not to be too euphoric at Wednesday’s meeting, despite the foreseeable smaller steps by the Fed: “These are most likely neither harbingers of imminent easing nor an indication that the Fed is returning to its old behavior, the markets to support.” In his view, the latter in particular could be a relic from times when inflation rates tended to be below the central bank’s target of 2.0 percent.
“The wage-price spiral could ensure that inflation remains at a high level for a long time,” says Konstantin Oldenburger, market analyst at the trading house CMC Markets. “This means that an interest rate pause is pushed back further, while the desire for a first interest rate cut in 2023 is likely to remain unfulfilled.”