Fed's interest rate hikes losing potency

21ST CENTURY BUSINESS HERALD | Updated: 2023-03-27 07:12

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The Fed rate announcement is seen on the floor of the New York Stock Exchange (NYSE) in New York City, US, Feb 1, 2023. [Photo/Agencies]

As expected, the US Federal Reserve decided last week to raise the target range for the federal funds rate by a quarter of a percentage point to 4.75 percent-5 percent, while continuing to sharply reduce its holdings of securities.

Since the collapse of Silicon Valley Bank and Signature Bank, there has been a lot of noise in the market that the Fed may slow the pace of its rate hikes.

However, it should be seen that while some banks face unusual capital needs, there is still ample liquidity in the system and the health and safety of the banking system of the United States is not in question.

Keeping price stability is the Fed's responsibility. The target is to bring inflation rate back down to 2 percent and below. The core personal consumption expenditures in the US rose by 4.7 percent in January. That indicates that the inflation rate is far from the 2 percent target.

No matter how much the Fed justifies its actions, it is hard to change the basic rule that higher interest rates can be harmful to long-term economic growth. The US economic growth has remained sluggish since last year, when its real GDP surged 0.9 percent, and the Fed's median forecast for real GDP growth is just 0.4 percent this year and 1.2 percent next year.

The Fed's tightening peak is over. In the absence of systemic shocks from other variables, it is already a high probability event that the US federal funds rate will move into the lower range in the future.

One of the main reasons why the US has been able to maintain a low price level for such a long time is its occupation of the higher position in the global value chain. Against the backdrop of its drastic disruption of global supply chains by the US, it is difficult to get the US core price level back into the 2 percent range.

Putting an end to its unilateralism, trade bullying, protectionism and decoupling practices can help stabilize the global industry and supply chains. That in turn can help bring down the high inflation in the US without hurting its economy.