ET Explainer: Why the Fed may dash rate cuts hope
US Federal Reserve chairman Jerome Powell on Thursday rattled financial markets worldwide by saying that the central bank was not yet confident that interest rates were at a sufficiently restrictive level to bring inflation to its 2% target. The statement, which leaves the door open for more Fed rate hikes, yanked five-year US bond yields above 5%, pushed the rupee to a record low versus the dollar, and sent stock markets tumbling.
Here is an explainer on what is complicating the inflation outlook for the US and the likely impact on domestic markets.
Is the stronger economy challenging the inflation outlook?
The key challenge that has emerged for the US Fed is to rein in aggressive economic growth spurred by extraordinary fiscal stimulus in the world’s largest economy during the Covid crisis. Central banks tackle high inflation by hiking interest rates, thus raising the cost of capital and reducing aggregate demand in the economy.
The Fed has raised interest rates by a whopping 525 basis points to a 22-year high over the past year-and-a-half, but key US economic growth metrics remain firm due to strong consumer activity. US CPI data was at 3.7% in September versus the Fed’s 2% target.
With US GDP expanding at a higher-than-expected 4.9% annually in July-September, gone are the predictions of a ‘hard landing’ or a recession which might have prompted the Fed to cut interest rates. Many economists now expect US growth to ease, but remain in the positive territory throughout 2024, pushing hopes of Fed rate cuts further in the distance.
What is the role of wage increases in the US?
A factor that has contributed to US inflation is tightness in the country’s labour markets caused by new dynamics in the workforce in the
