The American Fed Raised Interest Rates and Inflation Estimates, While Lowering GDP Growth Forecast

The American central bank on Wednesday raised interest rates at a slower pace than in the previous period, as expected in financial markets, but increased inflation estimates and lowered economic growth forecasts for the next year.

 

After raising key rates by 0.75 percentage points at the previous four meetings, the Fed on Wednesday increased the borrowing cost by 0.50 percentage points, to a range of 4.25 to 4.50 percent, which is their highest level in the last 15 years.

 

The statement from the American central bank following this year’s last meeting did not significantly change compared to last month’s, reiterating that further rate increases will be appropriate.

 

At a press conference after the meeting, Fed Chairman Jerome Powell stated that it is necessary to continue the fight against inflation to prevent expectations of rising prices from becoming entrenched.

 

– The inflation data for October and November are welcome signs of a slowdown in the pace of price growth. However, significantly more evidence will be needed to confirm that inflation is on a sustained downward trajectory – Powell said.

 

Economic estimates attached to the statement suggest that Fed leaders expect interest rates to ultimately be raised higher than previously anticipated in September.

 

 

The median forecast suggests that next year rates will be raised to a final level, at which the cycle of interest rate increases will stop, of 5.1 percent compared to the September projection of 4.6 percent.

 

This means that the Fed is likely to raise rates by an additional total of 0.75 percentage points next year, to a range of 5 to 5.25 percent, indicating that Fed leaders estimate inflation will remain high in 2023.

 

Thus, they expect consumer price growth to slow to an average of 3.1 percent next year from this year’s 5.6, but that is still higher than the 2.8 percent they estimated in September and significantly above the 2 percent target of the American central bank.

 

Due to higher rates, the Fed has lowered its GDP growth forecast for 2023 to 0.5 percent, while in September it expected growth of 1.2 percent.

 

Leaders of several major American banks have recently indicated that the economy could plunge into recession next year. However, Powell still believes that a ‘soft landing’ for the economy is possible.

 

– I think no one can know whether we will have a recession or not. And if there is one, whether it will be deep or not… That simply cannot be known – Powell stated.

 

On Wall Street, stock prices fell on Wednesday after the American central bank raised interest rates by 0.50 percentage points and indicated that borrowing costs would be elevated for a longer period than expected.

The Dow Jones fell by 0.42 percent to 33,966 points, while the S&P 500 slid by 0.61 percent to 3,995 points, and the Nasdaq index dropped by 0.76 percent to 11,170 points.

Investors expected such a move from the Fed, but they were discouraged by estimates that rates would be raised to higher levels than anticipated and that they would remain at those levels longer than expected.

Central bank leaders estimate that the final interest rate, at which the cycle of rate increases will stop, will reach 5.1 percent, while they expected 4.6 percent in September.

At that level, the Fed would halt the cycle of borrowing cost increases and wait to see how such monetary policy has affected inflation.

In previous days, stock prices had risen as investors hoped that the cycle of rate increases would end at lower levels, below 5 percent. They also hoped that the Fed might start lowering rates by the end of next year.

However, it seems that this will not happen as Fed leaders indicated that they expect rate cuts only in 2024, by one percentage point. At that pace, rates would also decrease in 2025.

 

European and Asian Markets Also Declined

 

The aggressive rate hikes by the Fed, as well as other central banks around the world, to curb inflation have caused fears of recession and a withdrawal of investors from riskier investments, such as stocks.

As a result, Wall Street is on track for significant losses this year. The S&P 500 index is currently down about 15 percent compared to the beginning of the year and is on track for its first annual decline since 2018, at the highest rate since the financial crisis of 2008.

Stock prices also fell on European exchanges yesterday. The London FTSE index fell by 0.09 percent to 7,495 points, while the Frankfurt DAX slid by 0.26 percent to 14,460 points, and the Paris CAC dropped by 0.21 percent to 6,730 points.

On Asian exchanges on Thursday, stock prices also fell following Wall Street’s decline the day before. The MSCI Asia-Pacific index, excluding Japan, was down about 0.9 percent around 7:00 AM, losing some of the gains from the previous two days.

Meanwhile, on the Tokyo Stock Exchange, the Nikkei index fell by 0.4 percent, while stock prices in Shanghai, Australia, Hong Kong, and South Korea fell between 0.3 and 1.2 percent.