Fed Revs Up Inflation Fight With A Sharp Rate HikeJune 16, 2022
The US Fed has made a big move towards curbing inflation by raising rates over investors’ forecasts. It is the first time since 1994 that the Fed will increase rates by this huge amount. According to the US central bank officials, the move became necessary following a huge reduction in the public’s trust in officials’ capacities.
The move raised the target federal funds rate by 0.75 percentage points. Thus, moving it to a range of 1.5% and 1.75%. The Fed’s hawkish stance will further tighten current credit conditions in the US housing and stock markets. Hence, there would likely be a slow demand across the country – the goal of the Fed.
Fed Might Keep Raising Rates For The Rest Of The Year
Fed officials anticipate additional but gradual rate raises for the remainder of the year. This increase might include another 75 basis point (bps) raise and a 3.4% Federal funds rate by year-end.
If this happens, it would be the first since January 2008. Interestingly, the Fed’s forecasts might slow down the economy remarkably. More important, it would lead to an increase in unemployment.
However, Fed chair, Jerry Powell, claimed that the Fed’s intent is not to induce a recession by putting people out of work. Powell’s remarks show the huge challenge authorities face in reducing inflation rates. Powell noted that the Fed’s goal is to make policies that will move inflation rates to around 2%.
However, they want to do that without slowing the economy’s growth or causing a sharp increase in the unemployment rate. Powell added, “We remain focused on our goal. However, it is now clear that many other factors we didn’t consider are starting to come into play. These factors are so important that they may make our target not become a reality.”
The Fed chair’s remarks referenced the Russia-Ukraine war and the global supply chain worries. Powell told the media that the Fed’s job is getting harder since the previous rate raise has failed to slow inflation. Instead, the rate has been increasing at a level that makes the public doubt their competence.
Making Faster Progress In Slowing Down Inflation
Last Friday’s survey results showed a sharp rise in consumer inflation expectations. Powell remarked that this sharp rise couldn’t be ignored and is enough push for the authorities to raise rates by more than 75 bps. Thus, it can achieve faster results in lowering inflation and regain the public’s eroding confidence in them.
This sharp rate raise aligns closely with monetary policies aimed at bringing prices back to normal. After the Fed’s announcement, bond yields fell sharply. Also, wall street stocks surged slightly at the close of trade yesterday. According to the interest rate futures markets, there is an 86% chance that the Fed will increase rates by 75 bps at next month’s policy meeting.