For a considerable period, Chair Jerome Powell and his colleagues have been closely monitoring economic data as part of their decision-making process. Strong economic indicators have influenced them to implement tighter policies, while evidence of slowing inflation has led to smaller and less frequent rate hikes.
However, this phase may be coming to an end. Recent data releases have shown robust performance across various economic aspects such as retail sales, nonfarm payrolls, housing activity, and inflation, all surpassing expectations. Nevertheless, policymakers have made it clear that they intend to maintain interest rates this time, likely with unanimous agreement.
One compelling reason for this decision is the significant surge in longer-term interest rates, primarily due to the Treasury sell-off. This increase can be attributed to a range of factors, including strong economic data and the government’s escalating borrowing requirements.
Carl Riccadonna, Chief US Economist at BNP Paribas, notes, “The data is making a very strong case for tightening monetary policy, but the Fed is emphasizing the impact on financial conditions due to the rise in Treasury yields, adding an extra layer of tightening.”
The broader implication here is that the Federal Reserve has shifted its focus towards risk management. It is now giving equal importance to preventing an excessive monetary tightening that could halt economic expansion as it is to bringing inflation back to its 2% target.
Fed officials are predicting that the US economy will slow down next year. However, they seem unwilling to test the economy’s limits, instead relying on favorable supply trends to cool down prices.
This new strategy comes with its own set of risks, especially considering the backdrop of an economy that recently gained momentum, achieving an annualized real growth rate of 4.9% in the last quarter. In nominal terms, the expansion was even faster than that of China, reaching approximately 9%.
Robert Brusca, President of Fact & Opinion Economics, raises concerns, saying, “Inflation risk has increased. We have a more assertive labor force, a tight job market, large deficits, and rising oil prices.” He believes that expecting a soft landing, where inflation slows down without causing significant economic pain, is an unlikely scenario.
Investors and analysts will closely watch Powell’s post-decision press conference for any indications regarding the possibility of rate hikes in the final 2023 meeting. If rates are skipped for the third consecutive time on December 13th, financial markets may interpret it as a signal that the policy rate has reached its peak within the current target range of 5.25% to 5.5%.
The Federal Reserve’s shift towards a risk management approach signifies its intention to carefully navigate the complex economic landscape, balancing the need to curb inflation with the imperative of sustaining economic growth.
Stay current with supply chain report news at The Supply Chain Report. For international trade tools, see ADAMftd.com.
#FederalReserve #JeromePowell #MonetaryPolicy #InterestRates #Inflation #EconomicData #RetailSales #Payrolls #HousingActivity #TreasuryYields #BNPParibas #USEconomy #EconomicGrowth #InflationRisk #LaborMarket #OilPrices #RateHikes #RiskManagement #FinancialMarkets #SupplyTrends #SoftLanding
