In a move that surprised some analysts, the Federal Reserve announced a 25-basis-points (BPS) increase in the Fed funds target rate, continuing its cautious yet assertive approach to monetary policy.
Johann Els, chief economist at PSG Financial Services, echoed sentiments of anticipation, noting a close decision was expected, yet there appeared to be room for the Fed to keep rates unchanged, particularly given the low wage growth and recent signs of disinflation.
The Fed's decision comes amidst a backdrop of heightened uncertainty, citing geopolitical tensions, resilient domestic spending, strong productivity growth, and steady job gains in alignment with workforce expansion.
“Inflation remains elevated”, the Fed stated succinctly, emphasising that the increase was aimed at hastening a return to the inflation target of 2%.
“The committee will deliver price stability,” the statement concluded, albeit with minimal guidance, a hallmark of Kevin Warsh Fed Chair's communication style.
While Els anticipated the potential for one or two more hikes in the near future, he does not foresee a prolonged cycle of rate increases.
“At most, I would expect another two or three increases, rather than a series of rate hikes,” he stated.
This cautious outlook implies that the Federal Reserve is navigating a delicate balance, attempting to address inflation while not stifling growth.
The implications of this monetary policy shift also extend to the global economic landscape, particularly influencing the US dollar and emerging-market currencies.
Els noted that the rate hike could bolster the dollar, constraining some of the recent gains seen in emerging markets, which have shown resilience in the face of changing financial dynamics.
What will the South African Reserve Bank do?
August inflation data will be released by Stats SA on September 23, with the Reserve Bank's Monetary Policy Committee (MPC) set to announce its interest rate decision later that day in the afternoon.
The key concern is the sharp increase in oil prices, with Brent crude trading around $107 a barrel.
South Africa is particularly vulnerable to higher international oil prices because the country imports most of its crude oil requirements.
Moreover, local analysts are now contemplating the potential ramifications for the South African Reserve Bank (Sarb).
“The Fed's decision raises somewhat the risk of a Reserve Bank rate increase,” Els acknowledged.
Economists divided over SARB
However, the recent release of lower inflation expectations may provide a counterbalance, making a rate hike less likely.
“I still think the Reserve Bank will keep rates unchanged at their meeting next week,” he said.
As the world watches closely, the Federal Reserve’s commitment to maintaining economic stability remains steadfast, albeit with a cautious eye on future developments.
However, other economists see a greater risk of another rate increase.
KPMG lead economist Frank Blackmore expects the Reserve Bank to raise the repo rate by 25 basis points, citing persistent inflationary pressures and the increase in oil prices.
“I think we’ll see action by Sarb next Wednesday that will result in an additional 25 basis point increase,” Blackmore said.
He warned that if geopolitical tensions and disruptions around the Strait of Hormuz continue, further increases could potentially follow before the end of the year.
For South African consumers, the immediate concern is whether the recent improvement in inflation can withstand the renewed pressure coming from fuel and transport costs.
The August inflation figures will therefore provide an important indication of whether the decline to 4.3% in July represents a sustained improvement or the low point before higher energy costs begin filtering through the economy.
With the Reserve Bank's inflation target remaining central to monetary policy, the September decision will be closely watched by households, businesses and financial markets.
ashley.lechman@nationalmg.co.za