The central bank is poised to maintain interest rates despite the economy’s resistance the world

Throughout his two-year war against inflammationFederal Reserve America High interest rates sought to discourage consumer spending, align demand with supply, and reduce the ability of U.S. economic growth to reduce price pressures.

It hasn’t happened yet.

First Financial markets With the U.S. Federal Reserve expected to hold interest rates at the end of a two-day policy meeting on Wednesday, policymakers must now decide whether the economy’s stronger-than-expected performance is the economy’s last gasp. The Covid-19 pandemic, or proof that monetary policy is still not tight enough to fully return inflation to the 2% target feeder.

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Since the last monetary policy meeting in September, when central bankers also left rates unchanged, incoming data have shown stronger-than-expected employment growth, stronger-than-expected economic growth and slower-than-expected growth in inflation, which at 3.4%, the central bank’s preferred indicator, is above the September target.

As Fed officials put it, there are reasons to be “prudent” when approving a new rate hike. Most notable are market-based interest rates, which are largely driven by investors regardless of any FED action.

The Returns Treasury bond U.S. long-term mortgage rates have risen since last summer, and the average rate on a 30-year fixed-rate mortgage has risen to about 8%, a level not seen in nearly a quarter century. Ultimately, Federal Reserve officials hope these developments will rein in spending by businesses and households.

However, it has been unclear in recent weeks when that will happen, as expected declines in hiring, home inflation, spending on services and other key data have been postponed by a sluggish economy.

Even rising bond yields, cited by some senior central bank officials as an alternative to the central bank’s own rate hikes, may be a recognition of the economy’s strength and an implicit signal that the central bank needs to do more to end the fight against inflation.

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“We believe real rates are higher due to strong growth in the US,” analysts say City Ahead of this week’s central bank meeting. “If we’re right, the Fed will fall behind the real growth and inflation curve,” even if the economy slows from the 4.9% annualized pace recorded in the third quarter.

Consumers want more

The US Federal Reserve will release its latest monetary policy decision at 1800 GMT. Governor of the Central Bank, Jerome PowellHe will hold a press conference after half an hour.

Investors are confident that the central bank will keep overnight interest rates within the range of 5.25%-5.50% set at its July meeting.

Since no updated economic or rate forecasts will be released at this meeting, the focus will be on whether the new monetary policy decision or Powell’s comments lean in favor or against further hikes.

At the September meeting, those in charge feeder They said they felt further fare hikes were necessary. If anything, then data may have opened that door.

GDP growth in the third quarter is a good example of the risks the Fed is trying to identify as pandemic savings combined with a low unemployment rate and continued healthy wage growth allowed consumers to continue strong economic growth.

That offset worries that events such as renewed student loan payments and weakening consumer confidence could backfire.

Conversely, consumer-oriented companies like McDonald’s and Amazon have reported earnings that beat analysts’ average estimates, while home prices have continued to rise despite high mortgage rates.

As pandemic-era programs pumped trillions of dollars into household bank accounts, economists have struggled to agree on when those extra savings will run out.

After last week Govt America After the release of surprising economic growth data for the third quarter, some analysts revisited the issue, suggesting that fuel consumption still has a trillion dollars to spare and that higher prices may be in the offing.

“Given consumer resistance, short-term risk may be a more important use of savings”Oxford Economics’ chief US economist Nancy Vanden Houten wrote. “There is a lot of talk about so-called ‘revenge spending’. (…) There may be more room to spend”He said, referring to the increase in expenses incurred while recovering from the pandemic.

Spending continues to grow despite consumer confidence levels, which according to the Conference Board have fallen to sluggish levels amid several concerns.

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“Consumers continue to be concerned about rising prices in general and grocery and gasoline prices in particular.”The Conference Board’s chief economist, Dana Peterson, said Tuesday after the business group reported that its index of consumer expectations for October was below the level that typically signals the arrival of a recession.

“Consumers were also concerned about the political climate and rising interest rates. Amid the recent turmoil, concern about war/conflict has also increased Middle East”.

All this was in the mind of the central bank.

Powell has said in recent months that the central bank’s monetary policy will generally work “as expected,” noting that higher borrowing costs and tighter financial conditions will eventually slow the economy, but may slow over time due to the lingering effects of the pandemic. A deep mismatch between savings and supply and demand, especially for labour.

In other words, a slow and progressive adjustment towards the 2% inflation target is underway. Central Reserve I don’t want to rush into the alternative if unemployment and unwanted recessions increase massively.

But Powell has said growth must slow, and if not, the central bank’s official interest rate must rise.

“It’s good that the economy is strong. It is good that the economy has withstood the austerity we have applied. “It’s good that the labor market is strong,” Powell said at his press conference after the Sept. 19-20 meeting. But still “If the economy turns out to be stronger than expected, we will have to do more in terms of monetary policy to get back to 2%. Because we will get back to 2%.