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Could the United States decide to impose sanctions on South Africa based on our ties with Russia? Here is a video & update from the chief economist at Stanlib, Kevin Lings, where he discusses where the risks could come from and possible responses that the US could take, and then finally his view on yesterday’s rate decision below. Here is the link to the podcast should you be interested: https://iono.fm/e/1319214

The US Federal Open Market Committee (FOMC) decided to leave interest rates unchanged at a target range of 5.00% to 5.25%. This was in-line with market expectations. The Federal Funds target interest rate has increased by a total of 500bps since the beginning of 2022. US inflation was last measured at 4.0%y/y in May 2023 (core inflation 5.3%) and is trending lower, although core inflation is sticky largely due to persistently high shelter inflation. The US labour market remains strong with the unemployment rate at 3.7%. While key parts of the US economy are slowing – including the housing market and housing activity as well as private sector fixed investment and industrial activity – activity data in some parts of the service sectors remains relatively firm – although on a slowing trend.

Within the FOMC statement, the Fed stressed that job gains have been robust in recent months, and the unemployment rate has remained low. In addition, inflation remains elevated. Although the banking sector is resilient, the Fed expects that tighter credit conditions for households and businesses are likely to dampen economic activity, hiring, and inflation. However, the extent of these credit effects remain uncertain.

The FOMC statement argues that keeping rates unchanged allows the Fed to assess additional information and its implications for monetary policy. While this is a reasonable policy stance, the updated “dot-plot” suggests that the FOMC members expect interest rates to increase two more times in the second half of 2023 (probably in July and September). Given the updated “dot-plot”, it is reasonable to suggest that the Fed should simply have continued to hike rates today rather than keep rates unchanged – which will lead to some additional confusion in financial markets and increased concerns about a more significant fall-off in US economic activity in the second half of 2023.

In the press conference following the FOMC decision, Chairman Powell highlighted that nearly all FOMC members think that “some further rate increases will be necessary” this year and that getting inflation back down to 2% has “a long way to go”. The FOMC also expects that interest rate will only start to be cut in 2024 and will continue to decline in 2025. Chairman Powell dismissed any discussion about rate cuts starting in 2023.

Overall, the FOMC decision to leave interest rates unchanged while at the same time signalling that interest rates are likely to increase further in the second half of 2023 suggests that while the Fed is willing to slow the pace of rate hikes, they remain concerned that the resilience in the US economy (especially the labour market) could keep inflation elevated and well above target for considerably longer period and that they have simply not done enough to get inflation back to the 2% target. Which, once-gain, highlights that the Fed would rather err on hiking rates too much than too little. Although this type of policy signalling from the FOMC will add to the uncertainty in financial markets (which is unhelpful from a credibility perspective), it does highlight the determination of the Fed to get inflation back to the 2% level and not simply accept a 3% to 4% level as “acceptably low” enough.