Dhe American Federal Reserve has continued to tighten its monetary policy with a key interest rate increase of 0.25 percentage points in the range between 4.5 and 4.75 percent. The step had been expected after corresponding communication from the central bankers. It was smaller than the rate hikes before. Fed Chair Jerome Powell justified the step with slightly declining inflation. The Fed is registering price reductions in goods and expects falling prices in the real estate sector in the foreseeable future. However, no deflationary tendencies can be identified in the service sector. “There’s still a lot to do,” Powell said of interest rate policy.
The Fed hiked 0.5 percentage points in December and 0.75 percentage points in each of the four previous meetings. In their statements on Wednesday, the central bankers emphasized that they expected further interest rate hikes to be necessary and appropriate in order to achieve the two percent inflation target. Central bankers made it clear that they will not let up until the target is reached. “The panel is determined to bring inflation back to 2 percent,” the press release said after the end of the two-day Fed meeting.
The hints of several future hikes and the emphasis on the inflation target should sober investors in the financial markets, who were counting on the tightening ending soon. Even so, stock prices rose during Powell’s press conference. Powell returned to the argument that the risks of easing too early are greater than the risks of tightening too much. While in the first case inflationary expectations could slip and high inflation could become entrenched, in the second case monetary policy tools would be available to ease financial conditions.
Fed can slow pace
Recent economic data gave the Federal Reserve some leeway to slow the pace of tightening. Inflation had eased recently. In December, prices were 5 percent higher than in the same month last year. Adjusted for energy and food expenditure, the increase was only 4.4 percent. Another factor influencing inflation is labor costs, which rose less sharply in the last quarter than at the beginning of the year. This comes as a surprise because the unemployment rate in the quarter was lower at 3.5 percent than at the beginning of the year. This points to a particularly tight labor market, which usually provokes higher wages.
The first indicators also suggest that American consumers are losing their desire to buy. Last year, consumers surprised economists and central bankers with their remarkably high propensity to consume. Not even high inflation could slow them down. The Americans were able to fall back on higher savings, which they were able to build up thanks to high government transfers and, at times, a lack of opportunities to consume. But the desire to buy has been subdued since October, although the winter holidays encourage shopping. Retail sales have declined in three of the past four months. The monthly savings rate shrank to 2.9 percent in November and 3.4 percent in December. It was last this low shortly before the 2007 financial crisis.
The rating agency Fitch is already ringing the alarm bells for one industry: The number of people who have taken on too much money with their car loan has risen significantly. According to Fitch, the proportion of defaulters on subprime car loans rose to 5.7 percent. In this case, defaulting means that the borrower is 60 days or more in arrears. In the best times in April 2021, the proportion was less than half as large.
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