The Daring 3%*

*Editor’s note: On March 4, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison

Financial analyst Roman Etkind on the causes and consequences of the fifth consecutive interest rate hike by the U.S. Federal Reserve.

The September meeting of the Federal Open Market Committee (FOMC) brought no surprises. As analysts expected, most of the FOMC members voted to raise the rate by 75 basis points (bp). In the run-up to the meeting, several experts had frightened everyone with fears of a 100 bp rate hike. The Fed’s decision means commercial banks are now targeting a 3 to 3.25% rate when offering savings accounts and issuing loans.

How did financial markets react to the Fed’s decision? The investors’ fears of an interest rate hike and continued tightening of monetary policy (usually manifested in rate hikes, money printing cuts and other measures) have already been reflected in the stock prices. That is, we saw a decline in the value of U.S. securities and rising yields on treasuries in the weeks before the meeting. Simply put, investors were selling stocks and buying safer securities from the U.S. Department of the Treasury or preferred to keep the dollars. Note that the stock market is an indicator of future changes in the economy or financial policy of the state, so prices change in advance.

The interest rate hike was followed by a statement from the Fed’s chief, Jerome Powell. Economists were alarmed by his suggestion of raising the rate to a level above neutral. That is, we can expect a more significant tightening of U.S. monetary policy. As a result, the interest rate may rise to 4.25 to 4.5% by the end of this year. Although further increases in 2023 were expected, so too was the rate’s decline in 2024. Now, however, economists fear that the interest rate will remain at or above 4.6% for a long time.

The Fed is raising the interest rate to combat very high inflation. The consumer price index, the leading indicator responsible for measuring inflation, rose 8.3% year-over-year in August, while the inflation target is no more than 2%. The traditional recipe for fighting high inflation worldwide is raising interest rates. But at the same time, tightening monetary policy hurts businesses and the public. After all, it raises the interest rate on loans and increases interest payments on floating rate loans. But high prices for raw materials and disrupted supply chains severely hurt many industrial enterprises in the U.S., which can stop production due to unprofitability. So Powell and his Fed colleagues will have to spend a while balancing the fighting against inflation and the risk of hurting the economy even further with soaring unemployment and shrinking tax revenues from closing businesses.

We can expect that the earlier official forecast of a 1.7% increase in the gross domestic product by the end of 2022 is no longer realistic. This leading indicator of the state of the U.S. economy will most likely increase by 1% or slightly more. The forecast for the unemployment rate, which should not exceed a range from 3.9 to 4%, could rise to 4.4 or 4.5% in America. There is also a risk of a repeat of the 2008 global financial crisis.

However, the U.S. economy serves as a benchmark for many countries due to strong trade ties and the use of the dollar as a reserve currency. Hence, the economic problems plaguing the U.S. affect other countries, especially the European countries. We can expect the central banks globally to keep raising interest rates in the coming months, affecting businesses and people’s living standards. Another negative factor for the European countries is a rise in energy prices. This factor is not as prevalent in the U.S. due to its domestic energy production.

It is expected that more interest rate hikes by the Fed will follow. The hikes are likely to be announced after the regulator’s two upcoming meetings this year and in 2023. But will the Fed be able to help the country cope with inflation and not slow down the economy? This question remains unanswered. At the moment, it is also challenging to say when the stock market will bounce back and whether investors in U.S. stocks will be able to notice the upward trends.

The author is an international financial markets analyst at Finmir Marketplace. The author’s opinion may not necessarily reflect the views of Izvestia’s editorial board.