Fed, ECB Monetary Policies: Central Banks Increasingly Likely to Exit Rate-Hiking Measures

Editorial

17:24 JST, November 4, 2023

Rate-hike measures in the United States and Europe are inching toward a turning point. It is becoming increasingly difficult to manage policies aimed at preventing economic degradation while taming inflation.

The Federal Reserve Board has decided to maintain its policy interest rate range of 5.25% to 5.50%, marking the second time for the U.S. central bank to preserve the same rate, having also done so at its previous policy meeting in September.

Speaking at a press conference, Fed Chair Jerome Powell said inflation has yet to subside, noting that there would be a time lag before the desired effects of monetary tightening are felt. Powell avoided mentioning further rate hikes.

It is understandable for the Fed to carefully assess the impacts of past rate hikes on economic activity and prices.

Year-on-year, the U.S. Consumer Price Index was 3.7% in September — down from its peak, but still above the Fed’s target of 2%.

The U.S. economy has remained robust with real gross domestic product expanding at an annualized quarter-over-quarter rate of 4.9% in the July-September period, up significantly from 2.1% in the April-June period.

Consumer spending has grown on the back of strong employment and rising wages. Many observers had expected the U.S. economy to stall in the second half of the year due to interest rate hikes, but current circumstances negate such predictions.

However, the future does not warrant optimism. Long-term U.S. interest rates briefly topped 5% in October, marking the highest figure in about 16 years. There are fears that a rise in the Treasury yield could cool the economy by pushing up interest rates on home mortgages and corporate borrowing — effects similar to those of monetary tightening.

Concerns also have been raised regarding the outlook for U.S. consumer spending due to such factors as the resumption in October of student loan repayments, which had been postponed due to the COVID-19 pandemic. The Fed must determine appropriate interest rate levels with more care than ever.

In Europe, interest rate hikes have begun showing signs of economic deterioration. Real GDP in the 20-country eurozone declined 0.4% for the July-September period on an annualized basis. This is likely because the eurozone, which relies heavily on energy imports, has suffered more than the United States in terms of higher energy costs.

In October, the European Central Bank decided to leave its policy rate unchanged for the first time since June last year. The decision appears to indicate the difficulty of striking a balance between raising interest rates and avoiding economic deterioration.

For its part, the Bank of Japan is continuing with its policy of monetary easing. However, the BOJ has made a series of minor tweaks to its measures to tamp down long-term interest rates. There are growing expectations that the central bank will make a comprehensive shift away from monetary easing, including lifting its negative interest rate policy.

It is hoped that the BOJ will carefully monitor moves by the Fed and the ECB and ready itself to adopt appropriate measures in response to changes.

(From The Yomiuri Shimbun, Nov. 4, 2023)