Restrained move: the US Federal Reserve kept the interest rate at 2-2.25% per annum

On Thursday, November 8, the US Federal Reserve maintained its base rate of 2-2.25% per annum. This decision was made by the Fed’s Open Market Operations Committee following a two-day meeting in Washington. Earlier, at a meeting in September, the US central bank raised the rate.

The actions of the Fed at the November meeting did not come as a surprise to analysts. As the experts interviewed by RT assumed, the regulator took a pause in tightening its monetary policy. Moreover, according to the data of the Chicago Commodity Exchange CME Group, just before the results were announced, the market estimated the probability of saving the rate at 92.8%, and its increase (to 2.25—2.5% per annum) - only at 7.2%.

“The Fed is trying to pursue a low-key rate-raising policy. As we remember, quite a bit of time passed from the last increase, which took place on September 26, so we should have assumed that the Fed will maintain the current level, ”Pavel Zhukov, an analyst at QBF, explained in a conversation with RT.

At the same time, as the expert added, today we can observe some slowdown in the American real estate market. There is a decline in sales of finished homes, and a reduction in the construction of new ones. Moreover, the country is also witnessing a fall in investment in production by American business. These factors, in turn, also forced the Fed to delay the next rate hike in November.

According to the expert of the International Financial Center, Vladimir Rozhankovsky, the predictability of the Fed's actions is also related to the lack of recent criticism from Donald Trump. Earlier, the President of the United States repeatedly made harsh statements about the central bank of the country and its chairman Jerome Powell. According to the head of the White House, the Fed, by raising interest rates in 2018, did not support the economic achievements of its administration.

“Now, when Powell feels more protected from Trump’s verbal attacks, who are obviously completely lost in thoughts about the outcome of the last parliamentary elections, the Fed Chairman has even more hands-off in terms of following his previously announced“ normalization ”plan credit policy in the United States. And in this regard, as you know, the increase in the key interest rate at this meeting was not listed, ”Rozhankovsky explained.

Recall that the global financial crisis forced the Fed to ease monetary policy and lower its interest rate. So, on December 16, 2008, a record low range was set - from 0 to 0.25% per annum. Such a measure was taken to stimulate economic growth during the recession - loans became cheaper, and, consequently, the level of consumption and investment volumes began to grow.

The American central bank took the course to raise the interest rate only from December 2015. According to experts interviewed by RT, such monetary policy tightening is carried out to prevent overheating of the economy. According to Pavel Zhukov, a rise in interest rates raises the cost of borrowing for American business and reduces overall economic activity in the country.

“When the central bank of a country raises the discount rate (that is, the rate at which it lends money to commercial banks for their capital needs), it thus increases the cost of loans throughout the state’s economy. With these actions, the regulator increases the value of money, which allows for profitable investments. Capitals are formed at an accelerated pace, but at the same time, expensive money leads to a slowdown in business activity, ”added Vladimir Rozhankovsky.

According to the expert, lowering the rate, on the contrary, contributes to the strengthening of economic activity in the country. At the same time, it is possible to tighten monetary policy in order to prevent overheating only under conditions of a healthy labor market and growing inflation. The acceleration of prices indicates a positive work of the retail segment of the economy and consumer demand growth. In the absence of these trends, it is not recommended to raise rates, Rozhankovsky summarized.

Pavel Zhukov stressed that the decisions of the US Federal Reserve System are of great importance for global investors and central banks of other countries. That is why the results of the meetings of the Fed are always riveted attention.

“The actions of the US monetary authorities are monitored throughout the world, as the Fed’s decisions are a kind of guide for other investors. For example, the growth in US bond yields, by virtue of the Fed's rate hike, triggers capital outflows from emerging markets, as well as from the US stock market. All this capital flows into the bond market - it makes no sense for investors to invest in stocks, since they can guarantee a decent income on the debt securities market, ”Zhukov said.

Preparation for the winter

Against the background of preservation of the rate following the meeting in November, experts do not expect a significant reaction of the currency and stock markets both in the USA and in the world. According to Pavel Zhukov, the retention of a pause in the tightening of the monetary policy of the Fed has already been taken into account by investors.

At the same time, as the expert notes, the rate increase could be a complete surprise for the markets. Such a development would lead to a flow of capital from the stock market into bonds and a fall in the stock indices of developing countries.

According to Vladimir Rozhankovsky, the markets received indirect confirmation that the rate will be raised at the next Fed meeting in December. According to experts, today there are all the necessary prerequisites for the next tightening of monetary policy before the end of the year.

“Macroeconomic data of the US economy is in favor of the December increase. We are talking about maintaining the unemployment rate at 3.7%. Moreover, in September, core inflation has already exceeded the target level of 2% and amounted to 2.2% in annual terms, ”concluded Pavel Zhukov.

The next meeting of the US Federal Reserve will be held December 18-19. According to the CME Group, to date, market participants with a probability of 75% expect a rate hike to a mark of 2.25-2.5% at the end of a future meeting.