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Officials from the Federal Reserve continue to display confidence in controlling inflation without the need for additional interest rate hikes. However, it is noteworthy that they still maintain a cautious attitude and are not ready to announce the end of the tightening cycle, let alone begin discussions about the possibility of interest rate cuts.
In this context, last Friday, Fed Chair Jerome Powell sent the strongest signal to date, indicating the possibility of completing the interest rate hike. In his speech, Powell emphasized that the current state of monetary policy has reached a sufficiently tight level, implying that this policy is affecting economic activities by slowing them down.
While Powell created a positive signal regarding the tightening of monetary policy, he also emphasized caution, stating that “it’s too early to confidently conclude that we have achieved a sufficiently tight stance.”
This indicates that the Fed is still adopting a cautious approach and needs more time and data to assess the stability of the market and the economy before making further strategic decisions.
CAUTION OF FED OFFICIALS
As the most powerful monetary policy leadership team globally, the Federal Reserve is demonstrating strength and confidence in controlling inflation without the need for additional interest rate hikes. Fed Chair Jerome Powell has sent the most positive signal to date, signaling the possibility of ending the interest rate hike cycle.
Powell shared the view that monetary policy is stable and has produced the tightening effects as expected, slowing down the pace of economic growth. However, he also expressed caution, emphasizing that “it’s too early for us to confidently conclude that we have achieved a sufficiently tight stance.”
Powell continues to maintain the view that policy easing will not happen soon, perhaps to reduce market expectations of the Fed cutting interest rates in Q1 2024. The rapid pace of interest rate hikes has made the Fed more cautious, opening up a discussion about the risks of raising interest rates too much or too little compared to previous considerations.
Although many analysts evaluate that Powell is “clearing the way” for the decision to maintain interest rates in the December meeting, Karim Basta of Ill Capital Management warns of the ambiguity when Powell warns of the possibility of further interest rate hikes and denies the possibility of an early rate cut.
In the tightening campaign from March 2022, the Fed has raised interest rates 11 times, with a total increase of 5.25 percentage points, bringing the federal funds rate to 5.25-5.5%.
Although they maintained the interest rate in the two consecutive meetings in September and November, if there is no change in the meeting on December 12-13, the interest rate will continue to be maintained at this level until at least January 2024.
The statement by New York Fed President John Williams clearly reflects the Fed’s caution when he emphasizes that their monetary policy is in the tightest state in 25 years and needs to be maintained “for quite some time.”
Despite a continuous decline in inflation for several months, Fed officials are still not ready to bet on an early interest rate cut. Instead, they want more evidence that the decline in inflation is stable and sustainable and also want to ensure that the economy and employment do not slow down faster than expected.
Therefore, the Fed’s monetary policy meeting on December 12-13 is expected to focus on how long the signal of the possibility of raising interest rates will continue to be maintained. It is expected that the Fed will not eliminate the tightening trend in this meeting, while emphasizing that removing this trend is a necessary step before considering the possibility of cutting interest rates.
Richmond Fed President Tom Barkin also shared his view on the possibility of further interest rate hikes if inflation reoccurs. Meanwhile, when asked about the possibility of a Fed interest rate cut, Williams spoke up, saying that it is only an assumption related to a distant future. He is also not too concerned about the market changing its expectations.
WHY IS THE FED CAUTIOUS
According to the Wall Street Journal, the Federal Reserve is exercising caution for several reasons behind this decision.
Fed officials do not want to hastily declare “mission accomplished” in combating inflation, even with recent signs of a slowdown in inflation. The reason is that both economic growth and inflation in the U.S. have experienced unpredictable fluctuations over the past three years.
Jonathan Pingle, chief economist at UBS in the U.S., emphasized, “There’s no reason to declare victory over inflation too soon, especially when economic growth is still ongoing, virtually unaffected by anything.”
In 2021, inflation in the U.S. rose sharply in the spring and then fell in the summer, leading the Fed to believe that inflation was only a temporary issue. However, as prices accelerated in the fall, the Fed had to deal with rising price pressures and implemented the first interest rate hike in March 2022.
Therefore, Fed officials are currently looking for evidence to prove that inflation continues to stay at 3% – higher than the Fed’s target of 2%.
The Fed also does not want to stimulate the stock market by declaring the end of the tightening cycle, as rising stock prices can stimulate economic activity, putting the task of combating inflation in a difficult position.
They particularly want to avoid making investors expect that the Fed will cut interest rates more aggressively than they anticipate while the economy continues to maintain positive growth momentum.
Despite this, investors are still heavily betting on the possibility of the Fed cutting interest rates in the first half of 2024, after reports of October inflation showed a significant easing of price pressures. This data has made some of the toughest Fed officials in the past 20 months begin to signal comfort with the current interest rate level.
Fed President Christopher Waller, a “hawkish” figure, recently expressed confidence that monetary policy has reached an appropriate state. In a Q&A session, Waller even opened the possibility of cutting interest rates in 2024 if the downward trend in inflation continues.
He said, “If we feel that inflation is truly decreasing and continues to decrease, we may start cutting interest rates.” This readiness has created a notable surprise in the Fed’s developments.
Reference: VnEconomy
By. Pham Thanh Bien
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