Interest Rates Will Continue to Rise: Fed
The US Federal Reserve (Fed) will continue to raise interest rates as the country’s “disinflation” process has only just begun and “has a long way to go,” says Chairman Jerome Powell. His remarks come a week after the Fed announced its eighth consecutive quarter-point interest rate hike, confirming a slowdown in rate hikes. Powell added that the Fed’s objective is to gradually return inflation to 2%, which “is the global standard.”
“This objective will not change… We are using our tools to get there over time. According to our forecasts, 2023 is going to be a year of significant declines in inflation… It will take, not just this year, but next year to get close to 2%,” said Powell at The Economic Club of Washington, D.C. He added that more rate hikes will follow. The latest hike put rates between 4.5% and 4.75%, their highest since September 2007.
Despite the hikes, the US labor market has remained strong and over 500,000 jobs were created during January, which puts into question traditional economic theories that say that rate hikes strongly affect a country’s labor market. “If you look at history, there is some weakening of the labor market (when rates are raised) and that is still possible, but this cycle is different from other cycles. The labor market is strong because the economy is strong. And as I mentioned, it is good that we have been able to see the beginnings of disinflation without seeing the labor market weakened,” says Powell.
Meanwhile, Mexico’s headline inflation accelerated in the first half of January, surpassing market expectations and marking the first monthly rebound since September. To control rising prices, Mexico’s central bank (Banxico) raised its benchmark interest rate by 650 basis points to 10.50% during the current hiking cycle, which began in June 2021. According to Reuters, Banxico is considering another interest rate hike at its next monetary policy meeting scheduled for Feb. 9. Banxico is also expected to gradually disengage from the Fed but still needs to raise its key interest rates at least once more and hold it at its peak for a minimum of six months to ensure inflation subsides, according to Jonathan Heath, a member of Banxico’s Board of Governors. Finally, Heath added that it is still early to tell when policies will begin to relax and that cuts are likely not around the corner, as previously reported by MBN.