Federal Open Market Committee, 20/9/2023

Federal Open Market Committee meeting, US Fed. 19-20/09/2023

Fed Funds Rate left unchanged for now.      

The Federal Open Market Committee voted keep the Fed Funds Rate at 5.25% - 5.5% during its meeting on 19^th and 20^th September. Already borrowing costs are at their highest level in more than 20 years. The run-off of assets purchased between 2020 and 2022 in response to the coronavirus pandemic will continue at an overall rate of $95b. per month. However, there remains flexibility for potential reinvestment “if needed for operational reasons”. In the ensuing press conference, Fed Chairman Jay Powell stressed that the FOMC will review the situation on a meeting-by meeting basis. “We are prepared to raise rates further if appropriate,” he declared, adding “we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective.” In other words, this may not be the peak of the tightening cycle. Additionally, the Fed hinted that rates are likely to remain above 5% through 2024.

After being on a downward trend for a year or so, consumer price inflation has picked up over the past two months after falling to 3% in the year to June, largely driven by recent increases in oil prices. The Core PCE – the Fed’s preferred measure of inflation – also went up, moving from 4.1% in June to 4.2% in July, with data for August still pending. Powell underscored the Fed’s determination to bring inflation down to 2%. However, he struck a fairly upbeat note in his broader assessment of the US economy, especially the robust jobs market and the retail sector’s 0.6% growth in August. The past three months have seen an average addition of 150,000 new jobs. Even the housing market has stablised. While prices increased by a modest 2.9% in the year to May 2023, this is a sharp contrast to the 19% increase to March 2022. However, June’s reading was slightly higher at 3.1%.    

The Institute’s estimates for US broad money figures suggest that M3 grew at an annualised rate of 6.2% in the three months to July 2023. Despite this growth, the annual rate remains in negative territory. Interestingly, this increase is being driven not by new bank credit but by monetisation of the US government’s budget deficit. Money Market Mutual funds, whose assets amount to $5½ trillion, or nearly 20% of US M3, have recorded an annual growth rate of nearly 20%, with much of this growth coming from increases in the stock of US Treasury securities. With the US budget already amounting to 9% of GDP in July 2023, it is highly questionable whether such a huge increase in public debt is sustainable. Without the contribution of the MMMFs, US M3 growth would be very sluggish. Growth in new bank credit has been negative on an annual basis since May. Unsurprisingly, the value of US bank deposits is also falling as are cash assets. With the Fed continuing to shrink its balance sheet (which at the current rate could reduce broad money growth by as much as $50b. per month), the recent M3 uptick may not prevent the US economy from escaping recession in 2024.