On December 14, 2022, Jerome Powell, chairman of the US Federal Reserve, speaks at a press conference held immediately after the FOMC regular meeting. ⓒAFP PHOTO The Federal Reserve System (Fed), the central bank of the United States, raised the benchmark interest rate by 0.5 percentage point again at the Federal Open Market Committee (FOMC) held on December 14th. It is 4.25~4.50%. The width of the impression was reduced. Unlike four consecutive increases of 0.75 percentage points, this time it ended 2022 with a 0.5 percentage point increase. It can be seen that the pace of interest rate hikes has also slowed as inflation has begun to enter a real phase. Indeed, the rate of increase in the consumer price index (CPI) (compared to the same period last year) declined for two consecutive months in October and November 2022. But the market wasn’t happy. Because I longed for something bigger. Investors hoped that the Fed would give a signal, even indirectly, of the extent of “in 2023, we will only raise the base rate to 5% or less and then cut interest rates in the second half of the year.” However, the FOMC’s statement on the day of the rate announcement was extremely disappointing. “Monetary policy must be sufficiently restrictive to bring inflation back to 2%. To this end, we expect ‘ongoing increases’ to be appropriate.” Fed Chairman Jerome Powell also reacted coldly at a press conference immediately after the FOMC, saying that although it is positive that inflation has eased, “it is not at the level originally expected.” “We need substantially more evidence to be sure that inflation is in a sustainable downturn (and thus stop raising rates),” he said. It is a story that the interest rate will be raised even more and will remain that way for a while. The reason for this decision is revealed in the ‘Summary of Economic Projections (SEP)’ issued by the Fed. The SEP is a compilation of the forecasts of 19 ‘interest rate policy makers (FOMC members and 12 regional Federal Reserve Bank governors)’ on major economic indicators such as inflation, growth rate and unemployment rate. It is considered the most important data to know the Fed’s intentions because it collects the opinions of interest rate policy makers. It is paid once per quarter. According to the SEP last December, only two out of 19 predicted that the benchmark interest rate would stay below 5% in 2023. 10 people predicted 5.1% and 7 people more than 5.25%. The median rate is 5.1%, which is located in the middle of several projections and supported by the largest number of policy makers. This means that interest rates are currently most likely to rise to 5.1% in 2023. However, the median SEP for September 2022 was 4.6%. In the period from autumn to winter, with various price indicators going down, the Fed’s interest rate policy makers felt the threat of inflation rather greater, and accordingly, it is interpreted that they decided to raise interest rates in 2023. Raising interest rates would exacerbate the economic suffering of most Americans. Perhaps that’s why policy makers who wrote the SEP last December set various indicators lower than their forecasts three months ago (September 2022). The US GDP (gross national product) growth rate for 2023, which was predicted at 1.2% in September, was lowered to 0.5% in December’s SEP. The unemployment rate estimate was raised to 4.6% from 4.4% in September. Why are policy makers at the Fed so pessimistic? First, because prices are coming down, but not at the rate the Fed likes them. Among several price indicators, the Fed’s favorite is the Personal Consumption Expenditure Price Index (PCE: an indicator of consumption of all goods and services excluding buildings and land). PCE inflation for October 2022 (compared to a year ago) was 6% (three times the Fed’s long-term target of 2%). The Fed’s September 2022 SEP projected PCE inflation to fall to 2.8% in the fourth quarter of 2023. However, in the December SEP, it was rather raised to 3.1%. Second, the Fed appears to be almost frustrated by the ‘too low’ unemployment rate in the US. A low unemployment rate usually means that the demand for labor is greater than the supply. Accordingly, when wages, the ‘price of labor’, rise, the increase is passed on to the prices of goods and services, raising prices. In November 2022, the US unemployment rate was 3.7%, the lowest level in half a century. In that one month alone, 263,000 jobs were added. Average hourly wages in November rose by 5.1% (2.5 times the inflation target of 2%) compared to the same period last year. In the third quarter of 2022, the United States’ economic growth rate showed an astounding performance of 2.9%, which is likely to further boost wage growth. The Fed sees ‘hot labor markets’ as the most important cause of inflation. In other words, to curb inflation, the labor market must be cooled. “There is no completely painless method.” So, the SEP’s forecast for the new year’s unemployment rate (4.6%) last December is more likely to be the product of ‘strong will’ than ‘objective estimation’. The Fed has a weapon that could lower the 2023 US economic growth rate to 0.5% (SEP forecast) and raise the unemployment rate to 4.6%. It is the right to determine the base rate. According to a Reuters article (December 17), raising the unemployment rate from 3.7% in October 2022 to 4.6% by the end of 2023 by 1 percentage point would eliminate 1.5 million jobs. According to a report (December 16, 2022) by PIMCO, the world’s largest bond management company, the wage increase rate (5.1% in November) must also drop by 1-2 percentage points to meet the Fed’s inflation target (2%) to some extent. claim it can However, “historically, wage growth declines at this rate only happen during economic downturns.” Chairman Powell said at a press conference after the end of the FOMC in December that he sympathized with the social pain that the rising unemployment rate would cause. “I wish there was a completely painless way to restore price stability. There is no such way. This (rising interest rates) is the best we can do.” Chairman Powell’s remarks are that he will only control inflation no matter what social pain it may cause. However, some in the market predict that if the interest rate hike causes an economic recession and even the possibility of a financial crisis, the Fed will have no choice but to break its ‘big will’. It is a scenario in which the Fed raises the base rate only to a level that does not exceed 5% and then cuts it twice by the end of 2023. However, the Fed cannot expose its ‘weak side’. That in itself will ignite the market and intensify inflation. Perhaps that’s why, after the FOMC last December, Fed executives are making hard-line remarks to the media. “I don’t know why the market is so optimistic about inflation,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said in a press interview. Because they only believe in scenarios that seem ideal to them.” Federal Reserve Bank of New York President John Williams did not rule out the possibility of going as high as 6%, saying, “The final rate may be higher than the SEP estimate (5.1%).” The central banks of the European Union (EU) and the UK are also making similar strides with the Fed. In December 2022, it announced that it would continue to raise interest rates in the new year while raising interest rates to a smaller extent than before. Central banks in developed countries will look for a path by looking at economic indicators coming out in 2023. If the inflation rate continues to be low and the unemployment rate rises noticeably, central banks may not be able to withstand the pressure to ‘change interest rate policy’. The Fed’s next FOMC meeting will be held on January 31st and February 1st.
ssn-general
The Fed is still thirsty
