But a ‘solid’ economy with still ‘strong’ job growth, Powell said
The US Federal Reserve held interest rates steady on Wednesday but stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.
The Fed’s benchmark overnight interest rate may still be lifted one more time this year to a peak 5.50 per cent-5.75 per cent range, according to updated quarterly projections released by the U.S. central bank, and rates kept significantly tighter through 2024 than previously expected.
“People hate inflation. Hate it,” Fed Chair Jerome Powell said in a press conference after the end of a two-day policy meeting at which central bank officials held the benchmark overnight interest rate in the current 5.25 per cent -5.50 per cent range, but sketched a stricter policy path moving forward in an inflation fight they now see lasting into 2026.
But a “solid” economy with still “strong” job growth, Powell said, will allow the central bank to keep that additional pressure on financial conditions through 2025 with much less of a cost to the economy and labor market than in previous U.S. inflation battles.
The central bank for the 20 countries that use the euro lifted its deposit rate to 4% from 3.75%, taking it to an all-time-high. Markets and economists expect the policy tightening move to be the ECB’s last and now anticipate a lengthy pause, followed by rate cuts in the second half of next year.
European Central Bank raises interest rates to 4%
Markets had seen unchanged rates as the most likely outcome of Thursday’s meeting only days ago but expectations shifted towards a hike after a source close to the discussions said the ECB would raise its 2024 inflation projection in new forecasts.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB said in a statement.
Policymakers have been pulled in opposing directions by stubbornly high price growth figures and rising recession fears.
Inflation is still stuck above 5% and markets do not see it falling back to the ECB’s 2% target even in the longer term as an exceptionally tight labour market pushes up wages and high energy costs keep the pressure on prices.
But growth prospects are fading quickly, partly due to higher interest rates, and even services – long the bloc’s bright spot – have started to weaken, raising the risk the economy will slip into recession.
“Shark Tank” investor Kevin O’Leary revealed the cold hard truth on America’s housing market, Tuesday, warning that September will be the start of “real chaos” for the U.S. economy.
Multi-millionaire Kevin O’Leary joined ‘Kudlow’ to discuss his outlook on the U.S. housing market, and economy. (Getty Images / Getty Images)
“This was inevitable. We talked about it six weeks ago, and now you’re just starting to see the chips start to fall. The layering is as follows: The regional [banks] don’t know yet what their capital requirements are going to be. So, their loan books have closed like a turtle in a shell,” he explained during an appearance on “Kudlow.”
“This gets worse before it gets better. And what’s it doing to small business? Killing them right now,” he warned Tuesday.
The Federal Reserve’s aggressive interest-rate hike campaign sent mortgage rates soaring above 7% for the first time in nearly two decades, cooling the post-COVID, red-hot housing market.
Rates have been slow to retreat, hitting a fresh two-decade high last week. Freddie Mac reported that rates on the popular 30-year fixed mortgage are hovering around 7.09%, well above the 5.13% rate recorded one year ago and the pre-pandemic average of 3.9%.
Additionally, the Federal Reserve approved yet another rate hike in July, setting the key benchmark federal funds rate to the highest level since 2001.
O’Leary argues that the U.S.’s troubled banking market is going to cause “real chaos in a very short term,” spotlighting the devastating impact some of Congress’ short-sighted economic policies has had on the average American.
“What I anticipate is going to happen here, while we still have full employment which is remarkable, and you don’t put any capital into the small business sector, which is 60% of the jobs in America, you’re going to start to see some real chaos come September, October, November. This is an issue for Congress, Larry. It’s very simple,” he continued.
“They gave all their money to S&P 500 in two acts, the Chips and Science Act and the other, Inflation Reduction Act. Not a dime for small business. A trillion for the big boys, nothing for the small guys. And the small guys, they run America, so it has to be rebalanced somewhere, Larry.”
Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
China cut its one-year benchmark lending rate on Monday as authorities seek to ramp up efforts to stimulate credit demand, but surprised markets by keeping the five-year rate unchanged amid broader concerns about a rapidly weakening currency.
The recovery in the world’s second-largest economy has lost steam due to a worsening property slump, weak consumer spending and tumbling credit growth, adding to the case for authorities to release more policy stimulus.
However, downward pressure on the yuan means Beijing has limited room for deeper monetary easing, analysts say, as a further widening of China’s yield differentials with other major economies could trigger yuan selloffs and capital flight.
The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.45% from 3.55% previously, while the five-year LPR was left at 4.20%.
In a Reuters poll of 35 market watchers, all participants predicted cuts to both rates. The 10 bp cut in the one-year rate was smaller than the 15 bp cut expected by most poll respondents.
“Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management.
“Chinese authorities care about currency market stability.”
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China cut both LPRs in June to boost the economy.
The onshore yuan eased in early trade to 7.3078 per dollar, compared with the previous close of 7.2855, while benchmark Shanghai Composite index (.SSEC) and the blue-chip CSI 300 index (.CSI300) also declined.
The yuan has lost nearly 6% against the dollar so far this year to become one of the worst performing Asian currencies.
The reduction in the one-year LPR came after the People’s Bank of China (PBOC) unexpectedly lowered its medium-term policy rate last week.
The medium-term lending facility (MLF) rate serves as a guide to the LPR and is widely read by markets as a precursor to future changes to the lending benchmarks.
China’s central bank has also pledged to keep liquidity reasonably ample and its policy “precise and forceful” to support the economic recovery, amid rising headwinds, according to its second-quarter monetary policy implementation report.
Russia hikes interest rates as rouble plummets amid strain of Ukraine war
The currency has lost more than a fifth of its value against the US dollar since the invasion of Ukraine began last year. Western experts say the cost of military spending and sanctions are the main reasons.
Russia’s Central Bank headquarters in Moscow
Russia’s central bank has hiked interest rates by 3.5 percentage points to 12% in an emergency move after the rouble plunged in value.
It comes after the currency fell to an almost 17-month low of 101 roubles to one US dollar on Monday – a loss of more than a third of its value since the beginning of the year.
But experts said the drastic move was unlikely to have much of an impact on Russia’s economic woes while its war in Ukraine and Western sanctions continued.
The currency did strengthen slightly on Tuesday morning following the rate announcement, but by lunchtime it had slipped to around 99 roubles to the dollar.
“As long as the war continues it just gets worse for Russia, the Russian economy and the rouble,” said Timothy Ash, a senior strategist at Bluebay Asset Management.
He added: “Hiking policy rates won’t solve anything – they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP [gross domestic product] growth – unless the core problem, the war and sanctions are resolved.”
Russia’s Central Bank made the move only hours after Vladimir Putin’s economic adviser, Maxim Oreshkin, publicly criticised the institution on Monday for the currency’s fall.
He attacked the “loose monetary policy” of officials and insisted the bank had “all the tools necessary” to stabilise the situation.
Inflation in Russia reached 7.6% over the past three months, the central bank has said.
It added that demand for goods exceeded the country’s ability to expand economic output, increasing inflation and affecting “the rouble’s exchange rate dynamics through elevated demand for imports”.
“Consequently, the pass-through of the rouble’s depreciation to prices is gaining momentum and inflation expectations are on the rise,” it said in a statement.
The Kremlin’s public criticism of the bank adds further pressure with Russia heading towards a presidential election in March 2024 as the cost of living rises.
