Recent dovish comments from the US Federal Reserve and upbeat economic data releases have raised expectations of more interest rate hikes from the US central bank this year. Fed officials recently indicated that the US central bank is inclined towards more rate hikes until they bring inflation back to desired levels.
Last year, the Fed raised its rates seven times, and at a pace unmatched since the 1980s. In 2023, policymakers are taking a different approach by raising rates at a slower and more deliberate pace. In February, the US central bank raised its rates by a quarter percentage point, raising the federal funds rate to 4.5-4.75 percent.
The prevailing US funds rate is the highest it has been since 2007 and expectations are the US Fed still has room for three or more quarter-point rate hikes this year.
Earlier, during the pandemic period, the bank brought down its rates to near zero and launched stimulus programs to protect its pandemic-hit economy.
However, the employment and inflation numbers will largely influence the Fed’s decision on further rate changes. According to recent statistics, the U.S. consumer spending January rose by the most in nearly two years due to a rise in wage benefits. Signs of a pick-up in inflation are raising fears that the Fed may continue raising rates in the summer.
The Fed’s rate hikes have helped bring inflation well below summer peaks, but it is still far from the central bank’s target levels. The annual inflation rate in the US is 6.41 per cent in January, compared to 6.45 per cent in December and 7.48 per cent last year. The long-term average for US inflation has been 3.28 percent.
However, the US job market posted strong growth in January and unemployment rate fell to its lowest level in more than 53 years. This reflects jobs being created in the US since 2019 three times faster than the pre-pandemic pace.
The Fed’s recent moves have supported the US currency and it has declined more than 9 percent from its twenty-year high last September. Earlier, the aggressive rate hike skyrocketed the value of the US currency which dented the global growth momentum.
To beat inflation, many other countries also raised interest rates. This has adversely affected the global growth outlook and raised fears of a recession. In the World Economic Outlook published in January, the IMF predicted that global growth is projected to decline in 2023 and that many economies will experience recession this year.
Meanwhile, fears of a recession have spread far and wide as several major economies have shown signs of recovery. In Europe, euro area business activity is ticking higher in the first two months of the year. Falling energy prices, supply chain improvements and a relatively mild winter have helped prevent a major economic downturn in the region.
of china economic activity Also painted an upbeat picture. Recent rising manufacturing and services activity data indicate that the country is in full swing after reopening the economy from pandemic restrictions. There are also expectations that the economy will continue to perform better in the coming months.
Either way, the combination of low inflation and sustained economic growth will prevent the global economy from entering a recession.
The writer is head of Harish V Commodities Geojit Financial Services
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