US Fed set to skip interest rate hike in key meeting: Expert

ISTANBUL

The US Federal Reserve is set to pause interest rate increases at its latest meeting concluding on Wednesday, according to Mark Zandi, chief economist at Moody’s Analytics.

“Inflation is moderating and will continue to do so. CPI [consumer price index] excluding shelter, which is 2/3 of overall CPI, is up 3.4% year-over-year,” Zandi said in an email interview with Anadolu.

“Shelter inflation is over 8%. But with the flatlining in rents, shelter inflation is sure to slow substantially. Thus, so too will overall inflation.”

The CPI rose 4% annually in May, the lowest gain in more than two years, easing from 4.9% in April, according to Labor Department data released on Tuesday.

The figure is also a significant decline from the 9.1% yearly gain seen last June, the largest since November 1981.

It is, however, still higher than the Fed’s inflation target of 2%.

“Why should the Fed sacrifice the economy to the altar of a 2% inflation target (closer to 2.5% for CPI), when I suspect most Fed officials think a 3% target makes more sense?” said Zandi.

The Fed will announce its decision at 2 p.m. EDT (1800 GMT) on Wednesday.

The probability of keeping rates unchanged stood at 94.2% at 9.51 a.m. EDT (1351 GMT) on Tuesday, according to the FedWatch Tool provided by US-based global markets company Chicago Mercantile Exchange Group.

If it is realized, this will be the first time the central bank keeps interest rates steady since January 2022.

The Fed raised rates by a total of 500 basis points from March 2022 to May 2023 in 10 meetings, pushing the federal funds rate to the 5.0%-5.25% range, in order to fight record inflation that climbed to its highest in more than 40 years last June.

“Unemployment is still below the Fed’s 4% estimate of full-employment, but my sense is full-employment is actually in the mid-3s, the unemployment rate that has prevailed for more than a year,” said Zandi.

“Afterall, this was the unemployment rate prior to COVID, yet wage growth and inflation were tepid back then.”

The American economy added 339,000 jobs in May, but the unemployment rate rose unexpectedly to 3.7%, up from 3.4% in April, according to Labor Department figures.

President Joe Biden, however, later said the unemployment rate has been under 4% for 16 consecutive months.

“Economic growth is fragile, the strong May payroll job gain notwithstanding. Hours worked per week have been falling, so despite all the jobs, aggregate hours worked have gone nowhere this year,” said Zandi.

“And the tight labor market is easing. Hiring is back to its pre-pandemic pace, layoffs are up, and workers are no longer quitting jobs at an extraordinary rate. Wage growth has rolled over. There are still lots of open positions, but I suspect many are soft opens.”

Regarding the recent banking crisis in the US, which saw three banks collapse in a matter of weeks, Zandi said aggressive government measures have “stemmed the deposit run on the system, but the system is fragile.”

“Consider the banks’ continued use of the Fed’s new credit facility. And depositors remain on edge given their continued move into money funds,” he added.