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HomeLatest NewsFed minutes put order on rate expectations: it's time for the break

Fed minutes put order on rate expectations: it’s time for the break

Date: February 24, 2024 Time: 21:49:19

There is division within the Federal Reserve (Fed) about what to do with interest rates. Whether to raise them beyond the 5%-5.25% range in which they hit on May 3 or, conversely, keep them there while waiting for the macroeconomic indicators to provide more clues about the direction of the US economy. The balance of forces seems to lean more and more towards the second option.

In any case, according to the minutes of the meeting three weeks ago, the members of the world’s most powerful central bank are beginning to give more weight to the economic outlook as credit crunch takes a toll on activity. Some members saw the need for further rate hikes, while others, including Chairman Powell, expected a slowdown in growth that would eliminate the need to continue supporting monetary policy as the Fed has been doing since March 2022.

In the end, the Federal Open Market Committee (FOMC), charged with setting rates, voted to remove a key phrase from its statement that “additional policy tightening may be appropriate.” . This is no longer the case, at least a priori.

Disinflation is about to celebrate 12 consecutive months in progress since in June 2022, the CPI marked a maximum of four decades at 9.1%. It has now slipped below 5% in the latest reading of the indicator and the Fed is beginning to factor in the likely entry into GDP contraction this quarter as a result of the credit crunch impacting the March banking crisis.

“In general, participants expressed uncertainty about how much further policy tightening may be appropriate. Many focused on the need for options to be kept open after this meeting,” the central bank’s minutes noted. In addition to the unanimous vote to raise rates at that meeting, the governors also agreed that “inflation was unacceptably high,” with the focus on the underlying rate, which had been “slower than expected.”

On the other hand, the Fed experts who participated in the two-day meeting incorporated the possibility of a recession into their discussion. “Participants noted that the risks associated with the recent banking stress led them to raise their already high assessment of uncertainty surrounding their economic prospects,” the document narrates, qualifying these forecasts for economic activity as “downward-weighted.” an early warning signal for the Fed.

The central bank cites its April survey of lending among banks (SLOOS) as another key factor in its decision-making. “Banks report further tightening of standards for most lending categories over the past three months, after widespread tightening in previous quarters. Banks of all sizes expected their lending standards to hold even further over the rest of 2023

At the March meeting, Fed economists had signaled that the expected credit crunch due to banking problems – bankruptcies and bailouts at SVB, Signature and First Republic – were likely to push the economy into recession. They repeated that assertion at the May meeting, though noted that if the credit crunch were to ease, that would be an upside risk to economic growth.

The release of the minutes comes amid mixed public statements by officials about where the Fed should go from now on and also with growing uncertainty about the risk of default on US government debt after June if not there is an agreement to raise the current ceiling of 31.5 billion dollars. Powell said earlier this month that the Fed would not be able to protect the US economy should that happen.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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