Will the Fed stop raising interest rates again?

The inflation top list on the way. With each rate hike in the coming months, the Fed creates room to lower interest rates again in 2023, if necessary, Edin Mujagic said. Then shares can do a reboot.

In the US, month-on-month inflation has fallen sharply. In April, prices rose by 0.3%; a month earlier, the increase was 1.2 per cent. Compared to a year earlier, prices were 8.3% higher.

In March, the counter was still at 8.5%, the US Bureau of Statistics reported earlier this week. Core inflation (excluding food and energy) was 6.2% higher (compared to a year earlier).

Compared with a month earlier, core inflation was 0.6%, up from 0.3% in March. The contribution from the energy part of the index was negative. The increase in the prices of food, airline tickets and housing contributed most to the increase in headline index

Too early

What these figures show is that inflation remains high, but inflation may be at its highest or may peak soon. It is still too early to draw such a conclusion, the figures for the coming months should provide more clarity.

What the figures also show is that inflation is being implemented much more broadly than in recent months (core inflation points to this). It is no longer primarily the energy story.

After rising energy prices initially fueled inflation through the rise in the energy component of the figure, high energy costs are now filtering through to other sectors of the economy.

Compared to last year

The fact that airline tickets have become more expensive is a good example. We can fly again, but fuel costs are much higher and the airlines pass them on. Food prices also point to this.

It simply costs a lot of fuel to grow food and then to process and transport it. The delayed effect of increased energy costs will appear more and more in the inflation figures in the coming months. However, the direct effect of the increased oil price will diminish.

For the same level of upward pressure from that quarter, another sharp rise in oil prices is needed, because inflation is the change in prices compared to twelve months ago.

Minor contributions

In the spring and summer of 2021, the price of oil was between $ 60 and $ 70. From the end of August 2021, the price of oil rose to $ 80. After a fall, the price of oil rose to $ 100 in December. This means that even if the oil price rises further to e.g. $ 130 in the coming months, its contribution to inflation will be lower!

Moreover, the further increase is not yet likely. From the summer onwards, a further slowdown in annual inflation should not be surprising; the temporary effects are slowly but surely disappearing from the numbers.

However, the fact that high energy prices are appearing in more and more places in the inflation curve means that inflation will stabilize at a significantly higher level than before the pandemic. I expect annual inflation to stabilize at between 2 and 4% in 2023 and 2024.

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That would be on the high side – the Fed is aiming for around 2% a year – but the soon-to-be expected downward trend could give the Fed ample reason to curtail its planned series of rate hikes, especially if the outlook for economic growth continues to deteriorate. to delay.

On the one hand because of the interest rate hikes that have already been implemented and are to be implemented in the coming months, and on the other hand because the temporary effect of recovery after a recession is also diminishing over time.

I would not be surprised if the Fed does not raise official interest rates in 2023 at all and even reverses some rate hikes from 2022. Do not get me wrong, the Fed will continue to raise interest rates so far in steps of 50 basis points.

Not bad news

For the bank can not do otherwise, given the development on the inflation front. But as time goes on, when inflation peaks, the need to keep going will diminish. And with each rate hike in the coming months, the Fed creates room to lower interest rates slightly in 2023 should the need arise.

The prospect of fewer interest rate hikes, if not a single rate cut, combined with lower, yet decent economic growth (especially if the war in Ukraine also ends before then).

And stabilizing inflation, albeit higher before the corona pandemic, but clearly lower than today’s figures, would not be bad news for stock markets.

Edin Mujagic is chief economist at OHV Asset Management and specializes in (the implications of) central bank policy. He has several books to his credit, including “Money Murder: How Central Banks Destroy Our Money” and “Captivating and Fascinating: The Money History of the Netherlands Since 1814/1816”. He studied monetary economics at Tilburg University. He writes personally. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments.

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