US Monetary Policy: Why the Rate Hikes When Inflation Is Under Control?
In an era marked by economic uncertainty and global financial shifts, the United States Federal Reserve has found itself at a crossroads, contemplating the prospect of yet another rate hike.
The implications of this decision may be met with some degree of confusion across the financial world, and as we delve into the intricacies of US monetary policy, the path forward becomes clearer.
Rate Hikes on the Horizon
In its September 2023 meeting, the Federal Reserve maintained the target range for the federal funds rate at a substantial 5.25%-5.5%. This decision followed a 25-basis-point hike in July, aligning with market expectations. However, what captured the attention of observers was the subtle yet significant signal that another rate hike may be in the cards before the year concludes.
The Federal Reserve’s projections, illustrated in the dot plot, unveiled the likelihood of an additional rate increase in the remaining months of 2023, with two potential cuts earmarked for 2024. Policymakers emphasised that recent economic indicators reflect robust expansion, characterised by solid job gains and a persistently low unemployment rate.
This move might raise eyebrows, given that inflation in the United States has remained under control for well over a year, standing at less than half of its counterparts in various parts of the European Union.
A Hawkish Hold
Just a week prior to this pivotal development, the Federal Reserve appeared poised for what experts anticipated would be a “Hawkish Hold.” The central bank was expected to maintain the federal funds rate within the 5.25%-5.5% range, as announced earlier in September, as it sought to gain a more comprehensive understanding of the impact of elevated borrowing costs on inflation dynamics.
However, while the Fed chose to maintain the status quo for the time being, it left the door ajar for a potential rate increase as early as November. Market observers remain vigilant, closely tracking fresh economic projections, especially as the spectre of rising oil prices looms large, potentially reigniting inflationary pressures.
Despite the myriad challenges facing the global economy, the US has displayed remarkable resilience, bolstered by robust consumer spending and a labour market that remains tightly wound. Although inflation persists above the 2% target, it stands considerably lower than the levels witnessed just a year ago.
The annual Personal Consumption Expenditures (PCE) rate, favoured by the Fed as its primary inflation gauge, inched up to 3.3% in July, compared to 3% in June. This figure pales in comparison to the alarming 6.4% recorded in July 2022.
The US Dollar’s Resilience
One notable aspect of this unfolding narrative is the US Dollar’s remarkable resilience against major global currencies. This phenomenon has captured the attention of analysts, particularly given the United States’ soaring debt levels.
While the country recently raised its debt ceiling to avert any potential default and ensure the servicing of its financial commitments, inflation in the US remains relatively subdued when juxtaposed with its equally developed counterparts across the Atlantic.
As we navigate the intricate web of monetary policy decisions and their repercussions, the future remains uncertain. However, one thing is clear: the United States Federal Reserve is treading carefully on the path to rate hikes, mindful of the complex economic landscape and the global ramifications of its choices. The world watches and waits as the Fed charts its course through these turbulent waters.
FXOpen offers spreads from 0.0 pips and commissions from $1.50 per lot. Enjoy trading on MT4, MT5, TickTrader or TradingView trading platforms!
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.