The US central bank - Fed Reserve (Fed) recently signalled a further rate hike could yet be in the offing as it was not yet confident that monetary policy is restrictive enough to bring inflation down to Fed’s 2% target.
But would Fed resort to another rate hike before the end of the year as slowing jobs growth and cooling wage pressures may give policymakers renewed confidence that the US economy is adjusting from the shock of the coronavirus pandemic, allowing inflation to ease further without more interest rate rises?
At its November 1 meeting, the US central bank kept its benchmark overnight interest rate steady in the 5.25-5.50% range.
The Federal Reserve held interest rates steady, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.
This, according to Reuters followed the Federal Reserve policymakers struggling to determine whether financial conditions may be tight enough already to control inflation, or whether an economy that continues to outperform expectations may need still more restraint.
Besides the Fed, the world’s two other major central banks - European Central Bank (ECB) and Bank of England (BoE) have kept their interest rates unchanged last week.
Projections released in Fed’s dot plot showed the likelihood of one more increase this year, then two cuts in 2024, two fewer than were indicated during the last update in June. That would put the funds rate around 5.1%.
Fed Chair Jerome Powell said the situation remained something of a riddle, with US central bank officials willing to raise rates again if progress on inflation stalls, wary that a rise in market-based interest rates may begin to weigh on the economy in a significant way, and trying not to disrupt, any more than necessary, an ongoing dynamic of steady job and wage growth.
Powell said the better course of action for now, given the uncertainties, was to maintain the Fed’s benchmark overnight interest rate in the current 5.25-5.50% range, and see how job and price data evolve between now and the next policy meeting in December.
Roughly 20 months into the Fed’s aggressive tightening of monetary policy, Powell said it remained unclear whether overall financial conditions were yet restrictive enough to tame inflation that he still considers to be far above the central bank’s 2% target.
After lifting the policy rate rapidly last year, Fed policymakers are seeking a stopping point that is high enough to bring inflation down but not so high that it does excessive damage to the labour market. The Fed indicated it is still steering toward what has been that historically elusive “soft landing” for the economy.
Overall, the latest jobs report was “tailor-made to match Powell’s soft landing message from earlier this week,” JPMorgan chief US economist Michael Feroli said in a note to investors.
GCC central banks followed the Fed in leaving interest rates unchanged in November. Oxford Economics now forecast the first rate cut to be in September 2024, four months later than expected.