Photo: TIMOTHY A. CLARY/Getty Images
After four increases in a row of 0.75% to the key rate, the Federal Reserve (Fed) relaxed the rate to 0.50% last December; however, monetary policymakers fear that such a decision has sent the wrong signal to the markets.
This is revealed by the minutes of the Fed’s December meeting, in which the members of the Fed Board expressed their fear of a misinterpretation of the markets.
The fear of the Fed is that the markets see in the deceleration of the increase of the key rate, a “abandonment” of the central bank of its strategy to control inflation and return to the 2% target.
Although it is true that inflation fell during the last half of the year, after the peak of 9.1% in its annual measurement reached in June 2022, for the Fed, the price hike is still unacceptably high.
Just in November of last year, inflation was 7.1% in its annual measurementwhile the Personal Consumption Expenditures Price Index was 5.5% in its annual measurement, lower than 7% in June, but almost three times the Fed’s target.
After nearly a year of high prices and key interest rate hikes to rein them in, the Fed is now fears that inflation will take root in the economy and that its effects are even more lasting.
“Participants cited the possibility that price pressures will prove more persistent than expected, due, for example, to the fact that the labor market remained tight for longer than expected,” the Fed minutes cite, in a report of The New York Times.
Monetary policy makers see on the horizon that inflationary prospects will remain highso their decisions will continue along the lines that were seen in 2022.
How far could the Fed go?
As noted, keeping the key rates up has a cost and the Fed knows it, which is why some analysts consider that the moment in which its movements could be near reach a peak.
However, that signal, as well as last December’s half-point rise, worries the Fed, as markets could see it as a a sign of weakening in the Committee’s determination to achieve its objective of price stability”.
But the problem can go further, because, the decision makers explained, monetary policy works through the markets and if market rates fall or stock prices rise, loans can be cheaper and easieran effect contrary to what the Fed seeks.
“An unjustified relaxation of financial conditions, especially if due to a misperception of the Committee’s reaction role, would complicate efforts to restore price stability“warn the Fed meeting minutes.
What the Fed seeks by raising its rate is to make loans more expensive and, with this, gradually cool down consumption, which would be canceled if there is a misreading of the markets of the central bank’s decisions regarding inflation.
This would happen mainly because the effects of the Fed’s rate hike are slow and are reflected until the costs are passed on to companies and passed on to workers, with lower wages and layoffs, which ultimately cools consumption. .
You may also like:
– The job market in the US healthy, but with signs of slowdown, according to BLS
– 4 ways to prepare your finances for economic uncertainty in 2023
– 3 useful tips to save money amid inflation that could persist in 2023