United States: the Fed ready for action, a sharp rise in rates expected before a possible slowdown

The Fed’s Monetary Policy Committee (FOMC) meets Tuesday and Wednesday at the institution’s headquarters in Washington, United States. Prices which continue to climb far too strongly, consumption which is holding up, a job market which is still tight: “We are almost certain that the FOMC will raise the rate range by an additional 75 basis points in November”, anticipate in a note, Jonathan Millar, Chun Yao and Colin Johanson, economists for Barclays.

This would be the fourth straight hike of this magnitude, and it would push Fed rates, currently between 3.00 and 3.25%, into the 3.75 to 4.00% range. The vast majority of market players are expecting such a rise, with others betting on the lower notch, by just half a percentage point, according to CME Group’s futures product valuation. The decision will be announced Wednesday at 2:00 p.m. (6:00 p.m. GMT) in a press release. Then Fed Chairman Jerome Powell will hold a press conference. Since March, the Federal Reserve has already raised rates five times, first by the usual quarter point, then by half. -point, and finally, three times, three quarter points.

A slowdown could occur by the end of the year

And then ? Will rates continue to climb in December? At the risk of weighing too heavily on consumption? Several Fed officials have spoken in recent weeks of a slower pace ahead. “The big question is whether the FOMC statement or the press conference that will follow will provide signals on the likely trajectory of policy in December,” Barclays economists point out. According to them, “the tenor of the discussion (…) will probably turn to the risk of excessive tightening”.

Because, if the United States returned to growth in the third quarter, with a GDP up by 2.6% after two quarters of contraction, recession threatens the year 2023. “A slower (economic) dynamic in the fourth quarter would support a slower pace of rate hikes, starting in December,” said Rubeela Farooqi, chief economist at HFE. But, she adds, “the results of inflation will take precedence over any weakening in the economy.” In other words, curbing inflation is the priority. At the risk of making the economy bend.

Inflation remained stable in September, at 6.2% over one year, according to the PCE index, favored by the Fed and published Friday by the Commerce Department. Still far too high, however, for the taste of the Federal Reserve, which wants to reduce it to 2%. The unemployment rate remains at its lowest for half a century, at 3.5%. Across the Atlantic, the European Central Bank (ECB) is also in the process of tightening its monetary policy: its key rates have just been raised by 0.75 percentage points for the second consecutive time.

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The rise in key central bank rates encourages commercial banks to increase the cost of the money they lend to their customers, both individuals and professionals, discouraging consumption. In the United States, consumption, which accounts for two-thirds of growth, has held up so far. But the very popular credit cards will certainly be released less and less in the coming months. Because as the savings accumulated by households during the pandemic dwindle, as stock market investments become less profitable, as real estate loses value, households will hesitate to spend lavishly.

Mortgage rates, which react upstream of rate hikes, have just exceeded 7% for the first time in more than 20 years, for a fixed rate over 30 years, the most common in the United States. Especially since inflation and the risks of economic slowdown, and even recession, affect a large part of the planet. This weak growth among the United States’ trading partners, but also the strength of the dollar, should limit exports, which will weigh on the American GDP.


Monetary policy is likely to weigh more and more on the State budget

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