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Macroscope | US Federal Reserve still seeking interest rate sweet spot as fall in inflation slows

  • While it’s not possible to rule out another US rate rise this year, the Fed looks to be entering a holding pattern
  • A resilient US economy together with the gradual labour market adjustment means inflation is falling slowly, which will keep rates higher for longer

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From the left, European Central Bank president Christine Lagarde, Bank of Japan governor Kazuo Ueda and US Federal Reserve chair Jerome Powell admire the view at the Jackson Hole economic symposium in Moran, Wyoming, on August 25. Photo: Bloomberg
Monetary policy is not the most exciting aspect of the economy, but it is a necessary one that garners a great deal of attention. Markets hang on central bankers’ every word and dissect what is – and often is not – said as they try to gauge where interest rates are heading in both the short and long term.
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As such, the annual central banker talkfest at Jackson Hole, Wyoming, was shaping up to be an important event for markets. The title of this year’s symposium – “Structural Shifts in the Global Economy” – was alluring, given that it opened the door for the likes of US Federal Reserve chair Jerome Powell and European Central Bank president Christine Lagarde to discuss events over the past few years and their impact on monetary policy.

Somewhat disappointingly, there was little new in the speeches. Powell repeated many of the themes from recent media events, highlighting that inflation was still too high and a period of subpar economic growth would be needed to get it back to the Fed’s target rate. Further rate increases should not be ruled out if the economy is too strong, he said, or the softening in the labour market doesn’t continue as expected.

All this is to say that the Fed remains data dependent, but aren’t we all? Based on the softer economic data since the Fed last met and the continued bias among several Fed members to raise rates, the September meeting is likely to result in a “hawkish skip”.

This seems to be the view of many, with the market pricing in a high chance that the rate will remain unchanged. However, heading into the November and December meetings, things are more evenly priced between a Fed hold and another rise of 25 basis points.

The US Federal Reserve building in Washington, on August 29, 2023. Market watchers are pricing in expectations that the US central bank will keep interest rates unchanged at its next meeting. Photo: Reuters
The US Federal Reserve building in Washington, on August 29, 2023. Market watchers are pricing in expectations that the US central bank will keep interest rates unchanged at its next meeting. Photo: Reuters
While it’s not possible to rule out another rate increase this year, the Fed seems to be entering a holding pattern as the resilient US economy and gradual adjustment in the labour market lead to a slow decline in inflation that will keep rates higher for longer.
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