No painless way to fight inflation in the US

Friday 30 September 2022

Amundi Convictions

September 2022 | 3 minute read  

  
The Federal Reserve Act established the commonly known “dual mandate”, explaining that the main responsibilities of the Fed are to “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”1. Achieving these objectives and striking the right balance can be an arduous task for policymakers, leading to some painful choices.

  

The Federal Open Market Committee (FOMC) of the Fed met on 20 and 21 September and decided to increase the Fed funds rate by 75 basis points, to the range between 3-3.25%. This is the fifth increase of 2022, as the US Central Bank continues to fight a persistently high inflation that has risen considerably over the course of this year

Jerome Powell, the Chair of the US Federal Reserve, has adopted a hawkish tone during the press conference, explaining how the Fed will continue to move rates into restrictive territory to try to keep rising prices under control. Powell acknowledged the fact that following this tightening policy will likely increase unemployment and dampen growth.

Unemployment forecasts have been revised higher, from 3.7% to 3.8% in 2022, 3.9% to 4.4% in 2023 and 4.1% to 4.4% in 2024. GDP has been revised lower from 1.7% to 0.2% in 2022, 1.7% to 1.2% in 2023 and 1.9% to 1.7% in 2024.
Mr Powell did not mention any precise number regarding the next rate increase, underlying that the Fed will remain data-dependent and closely monitor the economic outlook. The Chair however explained that there is the possibility of another 75 bp increase in November, explaining how “there’s a way to go”2 and the option remains in play.

The US Central Bank has also released its Summary of Economic Projections (SEP)3 which contains the “dot plot”, a chart that summarizes each Fed official’s projection for the short-term interest rate. Each dot represents a member of the board, one of the regional presidents of the Fed and the Chair itself.

By reading the dot plot, it seems that the Fed is showing the fact that it is not against higher terminal policy rates. The central bankers are now expecting, for the end of this year, a median rate of 4.375% versus the 3.375% in the projections in June. Similarly, for the end of 2023, they consider policy rate of 4.625% versus 3.875% expected in June. Fifteen of the nineteen members projected a funds rate that is above the median longer run dot of 2.5% in 2025.

It seems likely that the Fed will continue to hike its rates and follow the path of monetary tightening to achieve stable prices. The US central bankers have a difficult challenge ahead, as they need to find a good compromise between keeping price stability, avoiding an economic recession and a substantial increase in unemployment. “We have got to get inflation behind us,” Powell told reporters during the press conference. “I wish there were a painless way to do that. There isn’t.

FOMC Participants' Assessment of Appropriate Monetary Policy: Midpoint of Target Range or Target Level for the Federal Funds Rate

Source: Federal Reserve, Summary of Economic Projections, 21 September 2022.

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

Source: Amundi Institute, 20-21 September FOMC meeting: the move into restrictive territory, 23 September 2022

1 https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm#:~:text=The%20Federal%20Reserve%20Act%20mandates,for%20monetary%20policy%20is%20commonly
2 Federal Reserve, Transcript of Chair Powell’s Press Conference, 21 September 2022
3 Federal Reserve, Summary of Economic Projections, 21 September 2022

IMPORTANT INFORMATION
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 26 September 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.

Date of first use: 26 September 2022

Doc ID# 2443224


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