The US Federal Reserve raising interest rates by 100 basis points in September is unlikely, as record high inflation is expected to moderate, according to an expert with Moody’s Analytics.
“With the drop in energy and other commodity prices, inflation should moderate over the next couple of months,” economist Ryan Sweet told Anadolu Agency by email.
Sweet noted that the Fed’s decision will also depend on inflation data that will be released between now and its two-day meeting Sept. 20-21.
The hike of 75 basis points on Wednesday came as consumer and producer inflation levels are hovering around their highest levels in 40 years. US producer prices increased 11.3% in June on an annual basis, while consumer prices rose 9.1%.
The central bank has made interest rate increases of 225 basis points since March, while a hike of 75 basis points June 15 was the largest in 28 years.
Recession worries
The Fed’s aggressive monetary tightening, however, has been creating fears of a US recession, especially hitting the stock market hard in recent months.
Sweet, on the other hand, said it is difficult to argue that the US is in a recession when it is creating 400,000 to 500,000 jobs per month.
“The US economy is still growing as job growth remains strong,” he said.
Recession worries were fueled by negative GDP data released on Thursday. The economy contracted at an annual rate of 0.9% in the second quarter, according to the Commerce Department’s first reading, which followed a 1.6% contraction in the first quarter.
“GDP weakness so far this year has been attributed to the volatile and often mean-reverting components — net trade and inventories — while domestic final sales and gross domestic income have held up noticeably better,” according to Sweet.
“Also, GDP is only one of many variables that the National Bureau of Economic Research (NBER), the de facto arbiter of US recessions, uses to define a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.'”
GDP is one of many factors that the NBER considers when assessing if the US is in a recession. A recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months … a recession must influence the economy broadly and not be confined to one sector,” according to its definition.
But there is also a “technical recession” definition, which is when there are at least two consecutive quarters of negative growth in real GDP.
US President Joe Biden and Fed Chair Jerome Powell have dismissed that the economy is in a recession.
“We’re not going to be in a recession,” Biden told reporters Monday.
“My hope is we go from this rapid growth to a steady growth, and we’ll see some coming down, but I don’t think we’re going to — God willing — that we’ll see a recession.”
The president said in a statement Thursday that “it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation.”
Powell told reporters Wednesday that the labor market is very strong. “It does not make sense that the economy would be in a recession with this kind of thing happening,” he said.
“I do not think the US is currently in a recession. The reason is that there are too many areas of the economy that are performing too well,” he added.
‘Fed to hit 3.5%’
The probability of a rate hike of 75 basis points at the Fed’s September meeting was down to 24% Thursday, according to the FedWatch Tool provided by US-based global market company Chicago Mercantile Exchange (CME) Group. The probability of a hike of 50 basis points stood at 76% at 12.10 p.m. EDT.
Sweet believes the Federal Open Market Committee (FOMC) will get the federal funds rate to 3.5% and then pause before cutting interest rates.
The FOMC raised the target range for the federal funds rate to the 2.25%- 2.5% range with a hike of 75 basis points on Wednesday.
That still leaves room for the central bank to make additional rate hikes, but at lower rates, in the two remaining meetings this year on Nov. 2 and Dec. 14.
“It will likely be appropriate to slow the pace of increases” while the FOMC assesses how its cumulative policy adjustments are affecting the economy and inflation, said Powell.
However, he also said that another “unusually large” interest rate increase is possible in September and that the FOMC would not hesitate to move to make a larger rate hike.
Source: Anadolu Agency
