The US Federal Reserve did not change the policy rate in line with expectations and left it in the 5.25-5.50 percent band, the highest level in 22 years.
There are no surprises so far in terms of market pricing. The Fed’s tradition of not contradicting expectations remains intact. In this respect, all focus; expectations were managed and translated into officials’ projections, which were announced at one of every two meetings.
Projections regarding 3 basic indicators; It pointed out an upward revision in the interest rate and growth and a downward revision in the unemployment rate and inflation.
To look at it one by one; Fed officials’ year-end median expectation for the federal funds rate remained steady at 5.6 percent. He pointed out that only one more 25 basis point interest rate increase is on the table for this year. However, the increase in the median expectation for next year from 4.6 percent to 5.1 percent was interpreted as interest rates will remain at high levels for a longer time or very slow steps will be taken in the interest rate reduction process for next year. This pointed to a rather hawkish, that is, tight monetary stance.
The “soft landing” scenario in the economy has become stronger
Another important projection was in the growth indicator. The “soft landing” discourse was one of the most talked about topics in the Fed’s historical tightening process. This discourse, which increased the expectation that inflation could be fought by controlling the cooling in the economy, was actually met with projections. The growth expectation of the Fed officials; from 1 percent to 100 percent for this year It increased to 2.1 percent and from 1.1 percent to 1.5 percent for the next year. This revision, which doubled in growth expectations in the period from June to September, actually strengthened the possibility that the “soft landing” discourse in the economy could be successful. .
While expectations for growth are rising, the unemployment rate is falling, which is a development that supports each other from an economic perspective. On the other hand, the decrease in the median expectation for core inflation from 3.9 percent to 3.7 percent is an indication that the process continues to converge, even though the Fed is still far from its 2 percent target.
Real interest rates will be higher next year
Another detail that the expectations indicate is that the real interest rate in the USA is 2.3 percent for this year and 2.6 percent for next year. This actually shows that even if interest rates are not increased next year, there will be a tighter environment compared to this year.
Powell still cautious
After the decision text and projections were published, Fed Chairman Jerome Powell also answered questions from the press.
Powell said that it is a good thing that the economy remains strong despite the interest rate hikes, but he still has concerns about a soft landing. Using the phrase “I cannot say I achieved success without a soft landing,” Powell made one of the statements that will go down in the history of central banking: “You know sufficiently restrictive only when you see it…”
Regarding how they will understand whether monetary policy stances are tight enough, he said that “you will understand only when you see it” and that the data-driven process will continue.
It is possible to offer different opinions about whether the Fed has succeeded or whether it has given the correct guidance. However, what is clear now is that; Inflation expectations are coming down, although they are still far from the target; As for growth, the outlook manages to remain positive.