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Analysis: SARB keeps repo rate unchanged at 7.5%

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="547" src="https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-820x547.jpg" alt="" class="wp-image-416006" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-820x547.jpg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-300x200.jpg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-135x90.jpg 135w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-768x512.jpg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-1536x1024.jpg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-scaled.jpg 2048w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">A security guard walks in front of an image of the Federal Reserve following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington, March 16, 2016. REUTERS/Kevin Lamarque</figcaption></figure>



Despite a year’s worth of interest rate increases, inflation rose again in March, according to economic data released Friday that the Federal Reserve watches closely.



The personal consumption expenditures price index excluding food and energy increased 0.3% for the month, in line with the Dow Jones estimate. On an annual basis, so-called core PCE increased 4.6%, slightly higher than the expectation for 4.5% and down 0.1 percentage point from February.



Including the volatile food and energy components, headline PCE also rose just 0.1% for the month, equating to a 4.2% annual increase, down sharply from 5.1% in February. That measure peaked out around 7% in June 2022, the highest level since December 1981.



The headline number was softer as energy prices slid 3.7% for the month while food costs declined 0.2%. Goods prices fell 0.2% while services increased 0.2%.



In another key inflation measure for the Fed, the employment cost index increased 1.2% for the first quarter, higher than the 1% estimate.



The inflationary pressures were reflected in the willingness of consumers to keep spending. Personal income rose 0.3% for the month but consumer spending was flat, as expected.



While the annual rates are below the peaks hit in 2022, they are still well above the central bank’s 2% target and further evidence that price increases are proving stickier than policymakers had anticipated.



Since March 2022, the Fed has raised its benchmark interest rate nine times for a total of 4.75 percentage points. Markets widely expect the rate-setting Federal Open Market Committee to approve another quarter percentage point increase at next week’s meeting, before it pivots to see the impact the policy tightening is having on the $26.5 trillion U.S. economy.

FederalReserve

Key inflation gauge for the Fed rose 0.3% in March as expected

KEY POINTS



<ul class="wp-block-list"><li>Fed Chair Jerome Powell said he will back interest rate increases until prices start falling back toward a healthy level.</li><li>“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told the Wall Street Journal</li></ul>



Federal Reserve Chair&nbsp;<a href="https://www.cnbc.com/jay-powell/">Jerome Powell</a>&nbsp;emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.



“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told The Wall Street Journal&nbsp;<a href="https://www.wsj.com/articles/feds-powell-to-take-wsj-questions-on-inflation-and-economic-outlook-11652779802" target="_blank" rel="noreferrer noopener">in a livestreamed interview</a>. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.



“We’ll go to that point. There won’t be any hesitation about that,” he added.



Earlier this month, <a href="https://www.cnbc.com/2022/05/04/fed-raises-rates-by-half-a-percentage-point-the-biggest-hike-in-two-decades-to-fight-inflation.html">the Fed raised benchmark borrowing rates</a> by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high.



Powell said following that increase that similar 50 basis point moves were likely to come at ensuing meetings so long as&nbsp;<a href="https://www.cnbc.com/2022/05/17/retail-sales-april-2022-up-0point9percent-vs-1point0percent-estimate.html">economic conditions</a>&nbsp;remained similar to where they are now.



On Tuesday, he repeated his commitment to getting inflation closer to the Fed’s 2% target, and cautioned that it might not be easy and could come at the expense of&nbsp;<a href="https://www.cnbc.com/2022/05/06/job-growth-accelerated-by-428000-in-april-more-than-expected-as-jobs-picture-stays-strong.html">a 3.6% unemployment rate</a>&nbsp;that is just above the lowest level since the late 1960s.



“You’d still have a strong labor market if unemployment were to move up a few ticks,” he said. “I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”



The U.S. economy saw growth contract at a 1.4% pace in the first quarter of 2022, due largely to ongoing supply side constraints, spread of the omicron Covid variant and the <a href="https://www.cnbc.com/2022/05/17/russia-ukraine-live-updates.html">war in Ukraine</a>.



However, tighter monetary policy has added to concerns about a steeper downturn and has sparked an aggressive sell-off on Wall Street. In addition to the 75 basis points in interest rate hikes, the Fed also has halted its monthly bond-buying program, which is also known as quantitative easing, and will begin shedding some of the $9 trillion in assets it has acquired starting next month.



Powell said he still hopes the Fed can achieve its inflation goals without tanking the economy.



“You’d still have a strong labor market if unemployment were to move up a few ticks. I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that,” he said.



He added that “there could be some pain involved to restoring price stability” but said the labor market should remain strong, with low unemployment and higher wages.

Federal Reserve Chairman Jerome Powell Photo: via Flickr

Powell says the Fed will not hesitate to keep raising rates until inflation comes down

KEY POINTS



<ul class="wp-block-list"><li>The Federal Reserve increased its benchmark interest rate by half a percentage point, in line with market expectations.</li><li>In addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month.</li><li>The rate move is the largest since 2000 and is in response to burgeoning inflation pressures.</li><li>Fed Chairman Jerome Powell underlined the commitment to bringing inflation down but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering.”</li></ul>



WASHINGTON — The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation.



“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference, which he opened with an unusual direct address to “the American people.” He noted the burden of inflation on lower-income people, saying, “we’re strongly committed to restoring price stability.”



That likely will mean, according to the chairman’s comments, multiple 50-basis point rate hikes ahead, though likely nothing more aggressive than that.



The federal funds rate sets how much banks charge each other for short-term lending, but also is tied to a variety of adjustable-rate consumer debt.



Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its&nbsp;<a href="https://www.federalreserve.gov/releases/h41/20220428" target="_blank" rel="noreferrer noopener">$9 trillion balance sheet</a>. The Fed had been buying bonds to keep interest rates low and money flowing through the economy during the pandemic, but the surge in prices has forced a dramatic rethink in monetary policy.



Markets&nbsp;<a href="https://www.cnbc.com/2022/05/02/fears-of-a-fed-mistake-grow-as-this-weeks-anticipated-interest-rate-hike-looms.html">were prepared for both moves</a>&nbsp;but nonetheless have been volatile throughout the year. Investors have relied on the Fed as an active partner in making sure markets function well, but the inflation surge has necessitated tightening.



Wednesday’s rate hike will push the federal funds rate to a range of 0.75%-1%, and current market pricing has the rate rising to 2.75%-3% by year’s end, according to CME Group data.



Stocks leaped higher following the announcement while Treasury yields backed off their earlier highs.



Markets now expect the central bank&nbsp;<a href="https://www.cnbc.com/2022/05/03/the-fed-is-expected-to-raise-rates-by-a-half-point-investors-wonder-if-it-will-get-more-aggressive.html">to continue raising rates aggressively</a>&nbsp;in the coming months. Powell, said only that moves of 50 basis points “should be on the table at the next couple of meetings” but he seemed to discount the likelihood of the Fed getting more hawkish.



“Seventy-five basis points is not something the committee is actively considering,” Powell said, despite market pricing that had leaned heavily towards the Fed hiking by three-quarters of a percentage point in June.



“The American economy is very strong and well-positioned to handle tighter monetary policy,” he said, adding that he foresees a “soft or softish” landing for the economy despite tighter monetary policy.WATCH NOWVIDEO03:04A 75 basis point increase is not something we’re actively considering, says Fed Chair Powell



The plan outlined Wednesday will see the balance sheet reduction happen in phases, with the Fed allowing a capped level of proceeds from maturing bonds to roll off each month while reinvesting the rest. Starting June 1, the plan will see $30 billion of Treasurys and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasurys will increase to $60 billion and $35 billion for mortgages.



Those numbers were mostly in line with discussions at the last Fed meeting, as described in minutes from the session, though there were some expectations that the increase in the caps would be more gradual.



Wednesday’s statement noted that economic activity “edged down in the first quarter” but noted that “household spending and business fixed investment remained strong.” Inflation “remains elevated,” the Fed statement said.



Finally, the statement addressed the Covid outbreak in China and the government’s attempts to address the situation.



“In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the statement said.



“No surprises on our end,” said Collin Martin, fixed income strategist at Charles Schwab. “We’re a little bit less aggressive on our expectations than the markets are. Do think another 50 basis point increase in June seems likely. … We think inflation is close to peaking. If that shows some signs of peaking and declines later in the year, that gives the Fed a little leeway to slow down on such an aggressive pace.”



Though some Federal Open Market Committee members had pushed for bigger rate increases, Wednesday’s move received unanimous support.



The 50-basis-point increase is the biggest increase the rate-setting FOMC has instituted since May 2000. Back then, the Fed was fighting the excesses of the early dotcom era and the internet bubble. This time around, the circumstances are quite a bit different.



As the pandemic crisis hit in early 2020, the Fed slashed its benchmark funds rate to a range of 0%-0.25% and instituted an aggressive program of bond buying that more than doubled the size of its balance sheet. At the same time, Congress approved a series of bills that injected more than $5 trillion of fiscal spending into the economy.



Those policy moves were followed by clogged supply chains and surging demand as economies reopened. Inflation over a 12-month period&nbsp;<a href="https://www.cnbc.com/2022/04/12/consumer-prices-rose-8point5percent-in-march-slightly-hotter-than-expected.html">rose 8.5% in March</a>, as gauged by the Bureau of Labor Statistics’ consumer price index.



Fed officials for months dismissed the inflation surge as “transitory” then had to rethink that position as the price pressures did not relent.



For the first time in more than three years, the FOMC in March&nbsp;<a href="https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html">approved a 25-basis-point increase</a>, indicating then that the funds rate could rise to just 1.9% this year. Since then, though, multiple statements from central bankers&nbsp;<a href="https://www.cnbc.com/2022/04/05/feds-brainard-sees-balance-sheet-reduction-soon-and-at-a-rapid-pace.html">pointed to a rate well north of that</a>. Wednesday’s move marked the first time the Fed has boosted rates at consecutive meetings since June 2006.



Stocks have tumbled through this year, with the Dow Jones Industrial Average off nearly 9% and bond prices falling sharply as well. The benchmark 10-year Treasury yield, which moves opposite price, was around 3% Wednesday, a level it hasn’t seen since late 2018.



When the Fed was last this aggressive with rate hikes, it took the funds rate to 6.5% in early 2000, but was forced to retreat just seven months later. With the combination of a recession already underway plus the Sept. 11, 2001 terrorist attacks, the Fed rapidly cut, eventually slashing the funds rate all the way down to 1% by mid-2003, shortly after the Iraq invasion.



Some economists worry the Fed could face the same predicament this time — failing to act on inflation when it was surging, then tightening in the face of slowing growth. GDP fell 1.4% in the first quarter, though it was held back by factors such as rising Covid cases and a slowing inventory build that are expected to ease through the year.

106999520-16419153682022-01-11t153007z_1471999278_rc23xr9k3c5b_rtrmadp_0_usa-fed-senate-powell

Fed raises rates by half a percentage point — the biggest hike in two decades — to fight inflation

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The U.S Federal Reserve will hold a two-day meeting this week. Some analysts say while they do not expect major policy changes, they will be paying close attention to comments by U.S Fed Chairman, Jerome Powell especially on tapering bond purchases. Fitch ratings earlier warned that some of the world&#8217;s poorest countries were exposed to the risk of another taper tantrum as higher bond yields in the U.S could lead to a higher cost of Emerging Market borrowing. Dayo Amzat, Managing Director and CEO of Zedcrest Capital joins CNBC Africa for more.

Federal Reserve

Analysis: SARB keeps repo rate unchanged at 7.5%

Kganyago keeps rates on hold at 7.5% (full speech)

Norrenberger: Equities investors to remain cautious

Nigeria equities to sustain buy-side pressure

Analysis: SARB delivers 3rd consecutive rate cut

SARB cuts interest rate by 25 basis points to 7.50% (full speech)

Analysts unanimous: SARB to cut rates by 25bps today

How Nigeria’s FPI inflow impacts equities?

SARB: Is the inflation dragon dead?

SARB cuts interest rate by 25 basis points to 7.75% (full speech)

Will naira strengthen near-term?

Investors digest Q3’24 earnings, cherry-pick stocks

SARB announces 25bps rate cut (full-speech)

Key inflation gauge for the Fed rose 0.3% in March as expected

Powell says the Fed will not hesitate to keep raising rates until inflation comes down

Fed raises rates by half a percentage point — the biggest hike in two decades — to fight inflation

US Fed tapering fears: What it means for emerging markets

News Tips

Advertise With Us

Federal Reserve

Analysis: SARB keeps repo rate unchanged at 7.5%

Kganyago keeps rates on hold at 7.5% (full speech)

Norrenberger: Equities investors to remain cautious

Nigeria equities to sustain buy-side pressure

Analysis: SARB delivers 3rd consecutive rate cut

SARB cuts interest rate by 25 basis points to 7.50% (full speech)

Analysts unanimous: SARB to cut rates by 25bps today

How Nigeria’s FPI inflow impacts equities?

SARB: Is the inflation dragon dead?

SARB cuts interest rate by 25 basis points to 7.75% (full speech)

Will naira strengthen near-term?

Investors digest Q3’24 earnings, cherry-pick stocks

SARB announces 25bps rate cut (full-speech)

Key inflation gauge for the Fed rose 0.3% in March as expected

Powell says the Fed will not hesitate to keep raising rates until inflation comes down

Fed raises rates by half a percentage point — the biggest hike in two decades — to fight inflation

US Fed tapering fears: What it means for emerging markets

News Tips

Advertise With Us

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