The pause that the Fed is taking in the series of interest rate hikes is actually further slowing the pace of interest rate hikes. And not so much a possible end to those increases. That’s what BNR’s in-house economist Han de Jong says, comparing interest rate decisions to mooring a boat: as it gets closer to shore, the captain slows down.
In his press conference, Fed Chairman Jerome Powell stressed that the interest rate hikes are not over yet. “Remarkable,” says De Jong. “Yesterday it became clear that sixteen of the eighteen policy committee members still plan to raise interest rates further this year.” A majority of board members think it will be 50 basis points total, with some members even thinking it would be more.
“The parallels between the Fed and the ECB are clear”
Higher inflation
According to De Jong, this year the Fed has slightly raised its forecasts for economic growth and slightly lowered those for unemployment. “Although inflation has indeed come down in recent months and perhaps even more than expected, it was surprising that those policy committee members’ inflation expectations for this year were raised.”
Weakening of wage growth
In short, the committee’s goal is to slow wage growth to a rate consistent with 2% inflation. According to De Jong, the committee believes that the labor market will remain tighter for a while, given the low unemployment forecast. This reduces the possibility that wage growth will slow down sufficiently. ‘And then you have to do something more to slow down the economy.’
This is the dilemma Jerome Powell faces: if he is to meet the inflation target, he must actually slow down the economy and take measures that weaken the labor market.
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
