The decision by the US Federal Reserve’s Open Market Committee to raise the US central bank’s interest rate by 0.75% takes the rate to a high the US economy hasn’t seen since 2008. Additionally, the Federal Reserve announced a revision to its interest rate forecast, which says the rate will be 4.6% at the end of next year, well above the previously forecast rate of 3.8. %. After the announcement, Wall Street stock indices became volatile, falling as much as 1.8%.
“The Fed raised its interest rate in line with most expectations, and raised its rate forecast significantly for the coming years. It now estimates that the rate will rise to 4.4% at the end of 2022 (the previous forecast, in July was 3.4); to 4.6% by the end of 2023 (the previous forecast was 3.8%); and to 3.9% by the end of 2024 (the previous forecast was 3 .4%).This indicates that, like Chairman Jerome Powell, most Reserve members believe that interest rates will remain at contraction levels for a long time,” says Modi Shafrir, chief strategist of Bank Hapoalim.
“On a more encouraging note for markets,” adds Shafrir, “the Fed forecast for the end of 2025 is 2.9%, and the nominal long-term neutral rate forecast remains at 2.5%.”
Shafrir thinks the Federal Reserve’s new forecast will lead the Bank of Israel to also raise its interest rate forecast, to 3.5% for the end of next year, from 2.75% in its current forecast. .
Oppenheimer Israel co-CEO Harel Gillon sees the Federal Reserve’s decision as having a much broader goal than reducing inflation. “This is a copy-paste from the previous July statement. The wording is very similar. Although the Fed did not surprise the market, in my opinion, this is a bigger event The central bank took inflation and decided to use it to wean the market off the quantitative easing that started in 2008,” he says. Wall Street fell about 1%, but then rose slightly.Gillon explains this by the fact that the Federal Reserve has not been aggressive in relation to expectations, and that the market expects and hopes that the rate will inflation will go down.
“Now is the big test of the Federal Reserve, and it won’t be until a few months from now that we will know if it is succeeding. The huge amounts of money pouring into the economy during the Covid-19 pandemic, the big supply chain issues, and the war in Ukraine, have led to a change in mentality and the realization that policy needs to change The Fed wants to wean the market off of cheap money, and no one knows how this experience will end.”
And what about the consequences for the Bank of Israel? Gillon presents a somewhat unusual position, and argues that he should absolutely not raise his interest rate either in his next announcement on October 3. “The rise in the CPI has stopped for now, we are approaching the election, and if the government wants to stop inflation, it can do so by reducing the excise tax on fuel. The CPI of september should also be low like august when it was negative im not sure we have to chase after it is true that the shekel and dollar exchange rate will go up a bit but it is not necessarily a bad thing. The Bank of Israel has large reserves of foreign currency, and exporters will also benefit.
In contrast, Ronen Menachem, Chief Economist and Head of Research and Investments at Mizrahi Tefahot Bank, said: “In general, the Fed’s announcement has indirect consequences for the Bank of Israel, which adopted the early loading policy that prevails in most of the world, and therefore the Fed’s decision increases the chances that the interest rate will increase here too, probably by 0.5%.”
Published by Globes, Israel business news – en.globes.co.il – September 22, 2022.
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