“Stay the course until the job is done”

The stock market was initially shocked: the Dow Jones index lost more than 300 points in the meantime. It was one word in particular that unsettled investors Wednesday and that was the word “ongoing.” In its statement, the Fed wrote that “further interest rate hikes will be appropriate”. Powell also made it clear that the time for interest rate hikes is not over yet.

Asia’s stock exchanges reacted inconsistently. Prices fell slightly in Singapore and rose in South Korea. Japan’s stock market did not follow the trend of the US stock exchanges. After the Nikkei 225 index even fell briefly in morning trading, it then rose just above the previous day’s closing price.

We’ll stay the course until the job is done. Fed Chair Jerome Powell

Many market participants had hoped that Powell could soften his tone or even announce a pause in interest rate hikes as early as this week. After all, several central bank executives had signaled in the last few days and weeks that after last year’s aggressive stance, a more moderate approach was now appropriate. In addition, on Tuesday, the “Employment Cost Index”, an important indicator of the cost of salaries, was lower than expected.

Investors only calmed down somewhat during the press conference and all indices returned to positive territory. This was also due to the fact that Powell was a little more flexible when asked than in his first statement. The Dow Jones ended slightly up, while the broader S&P index was up 1 percent. The technology index Nasdaq Composite rose by two percent.

The head of the Fed made it clear that the central bank still sees inflation of two percent as its target. Powell also said it’s not yet the time to sit back and relax given the recent fall in inflation. “We’re talking about some more rate hikes here,” he said.

Fed Chair Powell refers to the new economic outlook in March

But Powell has also repeatedly emphasized that there will be a new outlook on the economy in March and that he and his colleagues will then take a close look at the new economic data.

>> Read also: Plus 2.9 percent: US economy grows faster than expected in the fourth quarter of 2022

In December, Fed members announced a medium-term interest rate target of 5 percent to 5.25 percent. That goal was not updated this week, Powell pointed out. But in March, that target could be revised up or down depending on current economic data, the governor made clear. He also pointed out that there are two more jobs reports ahead of the next Fed meeting.

Powell also clarified that he doesn’t expect a recession this quarter. “I’m assuming slight positive growth,” he said. He expects “inflation to fall steadily, but not rapidly,” he said. But he also made it clear: “If inflation falls faster, that will certainly affect our policies”.

Former Goldman CEO Gary Cohn interpreted Powell’s appearance as a sign of a change of course: “He had several opportunities to speak out as a hawk and he didn’t do it,” he told business broadcaster CNBC. Cohn believes the Fed could hike another 0.25 percentage point in March and then pause.

Everything depends on the job market

How the labor market develops will be decisive. “Everything now depends on the labor market,” said Cohn. The US labor market has remained very robust for a long time. However, there have recently been massive layoffs, especially at the technology companies.

According to a survey, US companies created far fewer jobs than expected at the beginning of the year. According to a company survey by the personnel service provider ADP, the bottom line was that only 106,000 jobs were created in January. Experts polled by Reuters had expected private sector jobs to increase by 178,000. The US government’s even more important jobs report, which also covers public sector jobs, is not due until Friday.

Jefferies market strategist David Zervos commented that he was surprised at “how relaxed” Powell was at the press conference. “It’s a different Powell,” said Ritholtz Wealth Management’s Josh Brown.

After the publication of the rate hike, David Kelly of JPMorgan warned that the Fed should not overdo it with rate hikes. “It would be smart not to overshoot and then have to backtrack.” The fear is that tight monetary policy increases the risk that the central bank will stall the economy. However, the US economy had grown surprisingly strongly at the end of last year, which has reduced concerns about a possible recession.

The tech companies live especially from new developments – they need a lot of money for that. High interest rates make it harder and more expensive to get fresh capital. That’s why the tech sector suffered particularly badly from the massive interest rate hikes last year.

>> Read here: IMF expects better times for the world economy again

Inflation is declining

LBBW analyst Elmar Völker, for example, commented on the Fed’s decision that the slower pace of monetary tightening is heating up the debate about how far away the US key interest rate peak is. US inflation has been on the decline since the summer of 2022. And the chances are good that the trend towards declining inflation will continue in the coming months.

From the point of view of Thomas Gitzel, Chief Economist at VP Bank, the “small” interest rate hike of 25 basis points should not be taken as a signal that the cycle of interest rate hikes is coming to an end. “The Fed still sees the need for further rate hikes,” Gitzel said.

The latest increase was the eighth in a row. At the same time, it was the smallest step since last March. Most recently, the Fed had raised the key interest rate by an impressive 0.75 percentage points several times, but slowed down the pace at the end of last year with an interest rate step of 0.5 percentage points.

Most recently, however, the rate of inflation in the USA had steadily declined – a sign of the first successes of the strict monetary policy. In December, consumer prices rose by 6.5 percent compared to the same month last year. In November, the rate was 7.1 percent. It was the sixth decline in the inflation rate in a row – but it is still high.

IMF: Central banks must not let up in the fight against inflation

Before this interest rate decision, the International Monetary Fund (IMF) also emphasized in its economic forecast that the central banks should not let up despite initial successes in their fight against high consumer prices. The battle is not yet won.

Keeping inflation in check is the traditional task of central banks. In the medium term, the Fed is aiming for an average inflation rate of around two percent. If interest rates rise, private individuals and businesses have to spend more money on loans – or they borrow less money. Growth is slowing, companies cannot simply pass on higher prices, and ideally inflation is falling.

With agency material.

More: Inflation in the euro area is falling surprisingly sharply – what a look at core inflation reveals

First publication on 2/1/23 at 7:46 p.m.; Updated on 02/02/23 at 05:31.