On Wednesday, the US central bank (Fed) raised the key interest rate by 25 basis points, as expected. The interest rate after withdrawal is 5.00-5.25 percent.
The interest rate hike was the tenth in a row in just over a year, and probably the last shortly. The central bank is now ready to take a break and observe the effects of interest rate hikes. So the Fed no longer stated in its announcement that interest rate hikes might still be necessary in the future.
Robert Brusca, Chief Economist of FAO Economics, told the financial magazine MarketWatch that the central bank has not determined to take a break, but rather monitors the situation and acts if necessary.
Fed chief Jerome Powell said at Wednesday’s press conference that interest rates may now be high enough to make the two percent inflation target possible.
US inflation has slowed in recent months. In March, the consumer price index (CPI) rose five percent year-on-year. PCE inflation, favored by the Fed, was 4.2 percent annually in March.
The Key Interest Rate Is Now At The Same Level As The Interest Rate Peak Before The Financial Crisis
The market is pricing in the Fed lowering the key interest rate during the rest of the year. However, Powell stated at the press conference that it is not in the Fed’s forecasts. The Fed predicts a reduction in the key interest rate only next year.
Powell said on Wednesday that the Fed will closely monitor the credit market due to challenges in the banking sector. According to him, the credit market was already tightening before the banking problems, but the challenges of the banking sector have weakened lending even more.
The Fed’s policy rate is now at the same level as before the financial crisis in 2006. The Fed raised the policy rate a total of 17 times in 2004-2006. The last rate hike was on June 29, 2006.
The first signs of the financial crisis appeared in November 2006, when the Department of Housing and Urban Development warned that new building permits had fallen by 26 percent in a year. The Fed did not react to the situation but kept the key interest rate the same until September 2007.
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The Growth Of Recession Risk Can Be Seen In The Investment Market
The stock market ended in the red after Powell’s comments. Among the main stock indices, the S&P 500 fell 0.70 percent and the technology index Nasdaq 100 fell 0.64 percent.
The market is pricing in an increase in the risk of a recession. The price of crude oil has fallen sharply in recent days. The price of WTI crude oil futures, which expires in June, is around 69 dollars per barrel on Thursday. At the beginning of May, the price was around 76 dollars. The drop in crude oil prices indicates a weakening of oil demand due to slowing global economic growth.
The interest rate market has already priced in a higher-than-average recession risk for several months. The US 10-year and three-month yield curve is the lowest in about 40 years. The interest rate difference is -1.84 percentage points. Based on history, it indicates a likely recession over the next four quarters.
DoubleLine Capital’s Jeffrey Gundlach is cautious about economic developments. He told CNBC that the risk of a recession has increased, and the Fed is no longer likely to raise interest rates.
PGIM Fixed Income portfolio manager Lindsay Rosner commented to the financial news agency Bloomberg that the company expects a technical recession. However, the timing of the recession is uncertain.
Rosner estimates that the Fed will change the direction of monetary policy in a recession because currently, the central bank expects moderate economic growth.
A change in direction would mean interest rate cuts. Powell mentioned on Wednesday that a mild recession is possible. However, he considers avoiding a recession more likely.
According to the Atlanta Fed’s GDPNow indicator at the beginning of May, the gross domestic product of the United States has grown by 1.8 percent in the second quarter of the year.
Good economic development is also indicated by the change in the number of non-agricultural jobs published on Wednesday. It was 296,000 in April.
Economists’ consensus forecast was 148,000. On the other hand, the number of open jobs published on Tuesday was disappointing. It portends a weakening of labor market activity.