There have been no surprises. The Federal Reserve has not raised interest rates at its meeting this Wednesday, leaving them in a range of between 5.25% and 5.5%, which, in practice, places them at 5.33%. It was a predictable decision. The central bank’s preferred measurement to measure price developments – the underlying index of private consumption – fell one tenth in September, to 3.7%. It is still very far from the 2% in the medium term that the US central bank has as the undeclared objective of its monetary policy, but it reaffirms the downward trend.
The question is what is going to happen in the future? The maintenance of rates at their current level – the highest in 22 years – was already expected, but the statement from the US central bank has not cleared up other questions. Among them: will there be a rise at the last meeting of the year, in mid-December? (most likely, no); And in the first quarter of 2024? (it is possible that yes); How can a rate hike at the beginning of 2024, as the market says, be squared with a 50 base rate drop in rates throughout that year, which is what the members of the monetary policy committee of the Fed? (it can’t be made to square; one of the two is wrong… or maybe both are).
Be that as it may, the panorama that the Federal Reserve must manage is complicated. The US GDP has accelerated, especially due to private consumption, which means inflationary pressures, even more so at a time when the economy is at full employment. In fact, the Fed has changed its economic analysis from “solid” to “strong” growth, warning that it is “prepared to adjust the monetary policy stance as necessary if risks emerge.” .
At the same time, a monetary restriction is occurring independent of what the central bank does with the price of money. Long interest rates, which in the US are very relevant – they are the benchmark for, for example, mortgages – are high, around 5% in the case of the 10-year bond, because the Federal Reserve is reducing the immense portfolio of debt that was purchased during Covid and, the more bonds are offered, the more interest must be paid for economic agents to buy them. This has put the interest on the average fixed-rate mortgage (which is 79% of those contracted in the US) at 8.08% (30 years) and 7.91% (20 years), and has triggered the fear of a fall in the real estate and construction sector, which accounts for 13% of GDP.
But the fear of a real estate crash is just one of the threats that loom over the United States. Another is an extension of the war in the Middle East that ends up causing a recession, or a closure of the public Administration in just over two weeks if the Republican extreme right decides to use that tool as a tactic to weaken Joe Biden with a view to the elections in 2024.