The Federal Reserve of the United States (Fed, central bank) is preparing to moderate the rise in interest rates next week, anticipate economists, at a time when the aggressive increases decided to combat inflation have an impact on the economy.
But the half-point jump analysts are forecasting in the Fed’s benchmark lending rate will remain a steep rise, amid efforts by the US central bank to cool demand to reduce consumer costs.
Households in the world’s largest economy have been grappling with red-hot prices, made worse by rising food and energy costs after Russia’s invasion of Ukraine in February.
To make borrowing more expensive, the Federal Reserve has raised interest rates six times this year, including four extraordinary 0.75-point hikes, to currently stand in a range of 3.75-4.00%.
"We think the stage is set for a (half point) increase this month"said Oren Klachkin, an analyst at Oxford Economics, noting that interest rate sensitive sectors such as housing and inflation are showing signs of easing.
The decision will be announced after a two-day meeting of the Fed’s Monetary Policy Committee (FOMC), which begins on Tuesday the 13th.
Policymakers closely monitor wage growth, fearing that higher wages will add to inflationary pressures.
"The Fed’s main concern is really wage growth."said Martin Wurm, an analyst at Moody’s Analytics.
"That doesn’t necessarily mean that (the benchmark rate) will keep going up forever, but it does mean that it will go up a bit and (…) stay high for the next year."Wurm explained to AFP.
With a higher benchmark rate, it becomes more expensive to borrow money for major purchases, like cars and property, or to expand businesses.
– "signs of stress" –
Despite the Fed’s crackdown, US consumer inflation was 7.7% year-on-year in October, while job creation remained strong, leaving markets nervous about the possibility that the central bank to prolong its aggressive campaign.
"Strong labor market, rising wages and robust household balance sheet (…) are key areas of support" for demand, said ING economist James Knightley.
Household wealth has risen $30 trillion since the start of the pandemic in 2020, he noted, allowing consumers to dip into their savings as the cost of living rises.
"However, we are also seeing increased use of consumer loans and credit cards to finance spending, which could indicate some signs of stress and that households’ efforts to maintain their standard of living are beginning to peter out."Knightley told AFP.
– Smaller recession –
Fed Chairman Jerome Powell suggested a possible easing of rate hikes in December, though warned they could stay at high levels "for some time".
The timing of this easing is less significant than questions about how much more rates need to be raised and how long tightening should be maintained, he added in a speech in late November.
While many economists believe there is a 50-50 chance of a recession, this probably means a small contraction in GDP, according to Wurm.
"What we wouldn’t necessarily expect is a major financial crisis like the one in 2008"he opined, adding that "large sectors of the economy are still in very good shape".
The US economy recovered strongly after Covid-19, while the lockdown period also brought profits for US companies, explaining the resilience despite the Fed’s sharp tightening.
Knightly, the ING analyst, said policymakers hold the mindset that the risk of doing too little is greater than the risk of doing too much.
"They will tolerate a recession to ensure they beat inflation"he added.