Fed maintains interest rates, but economist sees a new increase as likely and points to elections as a factor of uncertainty
For Betsey Stevenson, former chief economist at the Department of Labor, the American Central Bank hopes to see the economy slow down before raising interest rates again.
BY THE X-TRADER NEWS NEWSROOM · REPORTING FROM BLOOMBERG TELEVISION · 3 MIN
The Federal Reserve decided to keep interest rates unchanged, in a vote of 10 to 2, but the decision does not eliminate the prospect of a new increase. The assessment was made by Betsey Stevenson, professor of Public Policy and Economics at the University of Michigan and former chief economist at the US Department of Labor, in an interview with Bloomberg Television on the "Balance of Power" program.
According to Stevenson, the decision is intriguing because there is a consensus that the Fed will, sooner or later, have to raise interest rates. The economist considered that she did not want to say whether the monetary authority was right or wrong, but pointed out the question that remained in the air: if the increase is likely, why not do it now? She said reporters tried to get a clear answer from Fed Chairman Morse without success.
Why wait
In the interviewee's view, the best explanation is that no one considers the economy to be overheated at the moment. She described a labor market that moves slowly: unemployment is not high, but there is also no significant tightening, with little hiring and few layoffs.
According to Stevenson, the slowdown in activity, added to the interest rate hikes already carried out, could help to slow down the price trajectory. The Fed, in her reading, wants to have more time to understand what the economy can do on its own. "More likely than not", he said, the BC will raise interest rates again.
The limits of monetary policy
Asked about the effectiveness of interest rates in the face of pressures linked to the energy crisis in the Middle East, the war between Ukraine and Russia and the boom in artificial intelligence, the economist made a distinction. The first two factors, he said, are supply shocks: the Fed is unable to reduce the price of energy, and the risk is that the price increase will spread throughout the economy and fuel higher inflation. The BC tool acts by reducing demand.
The AI boom, in her opinion, continues to be a question of demand. Sufficiently high interest rates, he stated, would reduce investments in the sector, although the effect would also spread to the rest of the economy by making credit more expensive.
Stevenson observed that families are reluctant to cut spending: the savings rate falls and debt grows. For her, it is necessary to slow down consumption without bringing it down, but families are already starting to feel the pinch of a job market with fewer opportunities, high interest rates and a lot of credit taken.
Elections and public accounts
The Fed president said that the legislative elections, in six days, did not influence the decision. Stevenson assessed that the election still brings uncertainty, and that the Fed needs to respond to changes in fiscal policy, which is one of the reasons why waiting makes sense.
For her, public spending and debt are a great source of demand and act in the opposite direction to that desired by the BC. If the government becomes more fiscally constrained, it helps the Fed by moving in the same direction. The outcome in the coming months, he concluded, will influence the level to which interest rates will need to rise to bring inflation to the target.
For investors, the message is to be cautious with the trajectory of interest rates in the USA, which remain a reference for the stock market, dollar and Nasdaq. Fiscal discipline, in this context, appears as an ally of monetary policy.
Automatically translated from Portuguese.
