Fed: Leave interest rates unchanged and upgrade economic growth rate assessment

The US Federal Reserve (Fed) left the base interest rate unchanged again on Wednesday against the backdrop of economic and labor market growth, and an inflation rate that greatly exceeds central bank targets.

As a widely anticipated move, the Fed's interest rate decision group unanimously agreed to leave the main federal funds interest rates unchanged at 5.25% to 5.5%, which is the target range since July. Following the fact that the Federal Open Market Committee (FOMC) implemented 11 interest rate hikes, including 4 interest rate hikes in 2023, this time it was also held 2 times in a row.

The current decision also included raising the committee's assessment of the economy in general. Stock prices rose in response to this news, and the Dow Jones Industrial Average rose 212 points.

Fed Chairman Powell said at a press conference that “there is a long way to go in the process of sustainably lowering the inflation rate to 2%.” Chairman Powell emphasized that the central bank has yet to decide anything for the December meeting, and stated that “the Commission will always do what it deems appropriate at the time.”

Chairman Powell added that the FOMC is not considering interest rate cuts at this time, or even discussing them. Also, he stated that the risk of whether the Fed puts too much effort into inflation countermeasures or does not put too much effort into measures against inflation has become more balanced.

This suggests that while there is a potential risk that the Fed will do more, the hurdles for raising interest rates are getting higher.

In a statement after the monetary policy meeting, it was stated that “economic activity in the third quarter expanded at a strong pace.” The statement also pointed out that the increase in employment “has moderated since the beginning of the year, but is still strong.”

The gross domestic product (GDP) for the third quarter had exceeded expectations at an annual rate of 4.9%, and the number of people employed in the non-farm sector in September increased by 336,000, far exceeding Wall Street's expectations.

There were almost no changes in the statement other than the statement that both financial and credit conditions had been tightened. The expression “finance” was added in response to the sharp rise in government bond yields, which caused concern on Wall Street. The statement continued to point out that the committee was “deciding on the extent of additional policy tightening” that seemed necessary to achieve the goals. “The Commission will continue to evaluate additional information and its impact on monetary policy,” the statement said.

Wednesday's deferment decision is due to inflation slowing from a rapid pace in 2022 and the labor market recovering surprisingly despite all interest rate hikes. The purpose of interest rate increases is to mitigate economic growth and return the mismatch between supply and demand in the labor market to equilibrium. According to Labor Department data released before dawn on Wednesday, there were 1.5 jobs per worker in September.

According to the latest value of the personal consumption expenditure price index that the Fed likes to use as an index of prices, the core inflation rate is currently3.7% per annumIt has become.

In the statement after the meeting, it was shown that the Fed sees that the economy has remained strong despite interest rate hikes.

Over the past few days, “long-term interest rate increases” have become the central theme of where the Fed is going. While the Fed is determining the impact of the previous interest rate hike, several officials have stated that they think interest rates can be maintained as they are, in effect, no one has stated that interest rate cuts will be considered right away. According to the data,The first rate cut will be around 2024/6There is a possibility that it will

The restrictive stance is one reason for the rise in bond yields. Government bond yields have risen to levels since 2007, at the beginning of the financial crisis. Since yields and prices move in reverse, the rise in the former reflects a decline in investors' appetite for government bonds, which are generally considered the world's largest and most liquid markets.

The sharp rise in yields is seen as a by-product of multiple factors, such as economic growth that exceeds expectations, inflation that remains high, hawkish FRBs, and an increase in “term premiums” for bond investors seeking high yields in exchange for the risk of holding long-term bonds.

The government is trying to raise huge amounts of debt, and there are concerns about the Ministry of Finance's issuance. The Treasury Department announced this week that it will auction $776 billion in bonds for the fourth quarter.

In his recent speech in New York, Governor Powell stated that it may be necessary to further slow down the economy in order to keep inflation down. Most forecasters expect economic growth to slow down in the future.

According to the Ministry of Finance's forecast released earlier this week, the growth rate for the fourth quarter is likely to fall to 0.7%, and the growth rate for the full year 2024 will fall to just 1%. According to the forecast announced by the Fed in September, the GDP growth rate for 2024 will be 1.5%.

In response to the Fed's statement, the Atlanta Fed's GDPNow growth tracker almost halved the GDP forecast for the fourth quarter from 2.3% to 1.2%. This index captures data in real time and adjusts predictions with the latest information.

Whitney Watson, Co-CIO for Bond and Liquidity Solutions at Goldman Sachs Asset Management, said there is a high possibility that the Fed will keep its policy unchanged until next year.

There are risks in either direction. The rise in inflation expectations due to rising gasoline prices, combined with strong economic activity, maintains the outlook for further interest rate increases. Conversely, if the economic slowdown due to the spread of the effects of rising interest rates becomes noticeable, the transition period to interest rate cuts may be accelerated.