The era of great moderation in interest rates is over: Ajay Bagga

Ajay Bagga

The US Federal Open Market Committee on September 20 announced a pause in interest rate hike but it was a 'hawkish pause' at best, while Fed chair Jerome Powell hinted at another rate hike at the end of 2023, Ajay Bagga, Chairman of Elyments Platforms, told Moneycontrol on September 21.

Bagga added that messaging by the Fed was very consistent. He considers the recent Fed meeting to be a well-handled one, where all issues were discussed properly.

The Fed’s decision to not abide by the anticipated rate hike comes as the institution does not want to take their foot off the bridge too early and let inflation rise uncontrollably, according to the expert.

"The era of great moderation of 1982-2021 is now over. The era of low interest rates is over,” Bagga said.

The median projection or the Fed dot plot reflects that the fund rate will peak at 5.6 percent this year, translating to another quarter point rate hike in the November policy meeting.

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“Just when the Fed chair thinks of starting the accelerator (of rate cut cycle), inflation could raise its head up again,” said Bagga. The market expert recalled when Paul Walker raised the interest rates overnight to around 8 percent in the 1980s, which led to a massive recession in the US.

Inflation in the US remains sticky as the US Bureau of Labor Statistics data showed that the annual inflation rate rose in August to 3.7 percent from 3.2 percent while Core CPI, which does not include food and energy, decreased to 4.35 percent in August from 4.65 percent a month earlier. Meanwhile, the unemployment data is also showing an increase, with the number in August rising to 3.8 percent from 3.5 percent a month earlier.