Wednesday, September 20, 2023

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In December, the Fed may give the global economy a breather

The US Federal Reserve central banking raised its benchmark interest rate by 75bps on November 2, signaling that it is willing to slow down rate increases as the economy cools.

Jerome Powell, Fed chair, acknowledged the effects of rate increases on the economy, including decreased consumer spending and business investment. This could lead to the central bank raising its interest rate 50 basis points at its December meeting. Powell stated that although it could happen at the next meeting, or any other time after that, no decision has been made.

Where is inflation heading?

The main goal of the central bank is to stop runaway inflation. Officials are concerned that once workers have a greater expectation of higher prices for goods or services, they will be more willing to pay higher wages. This could lead to inflation spiralling out of control, as wages rise faster than prices.

This logic is not shared by all economists. It also takes into account factors other than wage negotiations between employer and worker. Powell acknowledged today that the Fed is guessing when the inflationary spiral will occur, since there are no empirical benchmarks. However, it is keeping its options open.

At the moment, inflationary pressures are slightly lessened. The personal consumption expenditure price index fell from 7% in June, to 6.2% in September. Powell stated that if longer-term expectations were rising, it would be “very troubling.”

As borrowing rates rise, the economy already has slowed down. Powell pointed out today that consumer spending has declined, the housing market is less healthy, and business investment has fallen. Powell said that the labor market is still tight despite job switch decreasing slightly. The slowing economy and the months-to years lag before rate hikes fully impact the economy will be taken into consideration in future rate decisions.

Even a partial slowdown can be good news for countries that have been hurt by a strong dollar. This gives central banks an opportunity to catch up with the Fed’s interest rate policy, hopefully without crushing their own economies.

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