US Fed should slow down pace of raising interest rates
Facing many months of persisting high inflation, the US Labor Department reported recently that the benchmark consumer price index, a major gauge of the country’s inflation, slowed down to 7.7 percent year-onyear in October, from 8.2 percent in September and 9.1 percent in June, which was the highest in 40 years. The CPI measures what consumers pay for goods and services, and its decline should give the monetary policymakers a hard-won relief.
Inspired by the news, financial markets across the world soared on the hope that previously staggering price rises and elevated inflationary pressure are now being curbed, finally, and the US economy might avoid a deep contraction in 2023.
Whether the US economy could come out of its traditional boom-andbust cycle this time largely depends on the Federal Reserve’s coming choice of monetary policy. The clear signs that workers’ wage growth is slowing and the inflation is coming off the boil should build up the case for the US central bank to pause or slow raising interest rate soon.
If the Fed chooses to continue its current strong monetary tightening measures by raising the federal-funds rate by 0.75 percentage point for the fifth time in a row during its next policy meeting on December 13-14, the US economic activity will be significantly watered down and cooled off, and consequentially, a deep recession will pop up quickly. The most appropriate move for the US central bank is to start adopting a piecemeal pace, raising the benchmark interest rate by 0.25 percentage point, or at most by half percentage point, in December.
Now as the CPI is clearly moving downwards, market investors have gained a glimmer of encouragement that interest rates wouldn’t have to rise to levels above 5 percent as previously estimated by the market.
The Fed officials have the luxury to see another month of inflation data from the Labor Department just before they convene their next policy meeting on December 13 and work out a policy decision the next day. There is a good chance that November’s CPI rise could come up at between 7.2-7.4 percent as compared to October’s 7.7 percent, which will further bolster the case that elevated inflation has been effectively tamped down, and the endpoint for the Fed’s current cycle of rate rises is probably at a range between 4.75-5 percent.
Some Fed officials have taken a more hawkish stance, saying that the US monetary policy will need to remain restrictive for some time to pull down inflation. Chairman Jerome Powell said that strong consumer demand, a tight labor market and more stubborn services price pressure in the US may continue to require the central bank to raise rates in 2023 to “slightly higher levels.”
As a matter of fact, the high inflation in the US has been fueled by the Fed’s extraordinary monetary easing policy, or quantitative easing, and the US government’s stimulus spending splurge in the aftermath of the outbreak of COVID-19 in 2020.
The recklessness of the US central bank in slashing benchmark interest rate to around zero, while purchasing several trillions of government T-bonds and other securities, and keeping that easing policy for too long, has triggered the current round of runaway inflation.