Do you remember high interest rates?
The Fed raised rates by half a percentage point at its meeting last month, the first such increase since 2000, to a range between 0.75% and 1% REUTERS
Amid the meltdown in global markets, which is largely due to investor fears of a deepening global recession and accelerating inflation, The Federal Reserve (Fed) of the United States has a meeting scheduled for next Wednesday and it is likely that a series of worrying inflation reports in recent days will lead the officials of the central bank of that country to carry out an increase in the interest rate in 0.75 percentage points according to The Wall Street Journal.
According to the publication, before Fed officials began their period of silence prior to the meeting on June 4, they had signalled that they were prepared to raise interest rates by half a percentage point this week and again at their July meeting. But they had also said their outlook hinged on the economy performing as expected. In that context, last week’s inflation report from the Department of Labour showed a larger increase in prices in May than US central bank officials had anticipated.
According to WSJ, two consumer surveys also showed that households’ expectations of future inflation increased in recent days. Such data could alarm Fed officials because they believe such expectations may be self-fulfilling, the article noted.
The Fed raised rates by half a percentage point at its meeting last month, the first such increase since 2000, to a range between 0.75% and 1%. The Fed last raised rates by 0.75 percentage point at a meeting in 1994.when the US central bank was rapidly raising rates to head off a possible rise in inflation.
The article also notes that the Fed chairman, Jerome Powell avoided surprising the markets on the day of the policy meetings and, instead, He argued that the entity can achieve its goals of tightening policy by shaping market expectations.
Federal Reserve Chairman Jerome Powell prepares to raise interest rates amid rising inflation in the United States REUTERS
Powell said in an interview last month that the Fed would be guided by economic data. “What we need to see is clear and convincing evidence that inflationary pressures are easing. and inflation is going down. And if we don’t see that, then we’ll have to consider moving more aggressively,” the Federal Reserve chairman said.
The Fed last raised rates by 0.75 percentage point at a meeting in 1994, when the US central bank was rapidly raising rates to head off a possible spike in inflation.
The WSJ He further noted that at a press conference last month, Powell asserted that the central bank “would strive to avoid adding uncertainty”, but also acknowledged the possibility of “more surprises” in the inflation data. “Therefore, we will have to be agile to respond to the data that arrives and the evolution of expectations,” said the head of the Fed.
He also recalled that the Department of Labour reported on Friday that its consumer price index increased 8.6% in May compared to the same month last year, which took inflation to a 40-year high. That was a setback for those looking for signs that inflation had peaked in March. Rising fuel prices and supply chain disruptions from Russia’s war against Ukraine have pushed prices higher in recent months.
The Labour Department reported Friday that its consumer price index rose 8.6% in May from the same month a year earlier, pushing inflation to a 40-year high.
According to WS Ja handful of Wall Street forecasters, including investment banks Barclays and Jefferies, said Friday, after the inflation data was released, that they expected the Fed to raise rates by 0.75 percentage point this week.
“We believe that risk management considerations call for aggressive action to bolster the Fed’s credibility in fighting inflation. Barclays economists wrote in a subsequent report on Monday. While such a move “would run counter to communications leading up to the lockdown period,” the report says “risks of prolonged inflation have intensified,” justifying the higher rate increase.
After the publication of this article on Monday afternoon, other forecasters, including JP Morgan Chase and Goldman Sachs, agreed that they expected a rate increase of 0.75 percentage points this week.
The publication also noted that on Friday, a University of Michigan survey of consumers’ long-term inflation expectations rose to its highest level since 2008.
The debacle in world markets is largely due to investors' fear that a global recession will deepen and inflation will accelerate, which would prompt Central Banks to increase interest rates REUTERS
The debacle in world markets is largely due to investors’ fear that a global recession will deepen and inflation will accelerate, which would prompt Central Banks to increase interest rates REUTERS
On Monday, the New York Federal Reserve reported that its survey showed that consumers’ short-term inflation expectations had risen and that the distribution of households’ long-term expectations were more mixed than in the past, which suggests that more households could be waiting for higher inflation to continue, although the median did not increase”, he detailed.
According to the article, Fed officials said they would want to respond aggressively to signs that inflation expectations are rising or “unanchoring” because they believe the process of removing inflation from the economy will be much more difficult if that happens.
“It’s a double whammy,” said Diane Swonk, chief economist at Grant Thornton. “They have to go to 75 now. The Fed is behind the curve, and they know it,” she added.
In another order, the WSJ He said bond yields, which rose on Friday amid a broad market sell-off, continued to rise as that slide deepened on Monday. He noted that investors in interest rate futures markets put a nearly 30% chance on the biggest 0.75 percentage point increase on Monday afternoon, up from around 4% before the inflation reports from the last Friday, according to CME Group. And he added that after the article was published, those market-implied odds rose above 90 percent.
According to the prestigious American media, officials will have to weigh various considerations at their two-day meeting that begins Tuesday. In that sense, he considered that they could continue with their current strategy of raising rates in increments of half a percentage point indefinitely until they see signs that inflation is definitively decreasing.
“This trajectory of rate hikes would push the Fed’s overnight rate to a range between 2.25% and 2.5% in September, and between 3.25% and 3.5% in December. . This would represent the most aggressive interval of policy tightening since the 1980s. Alternatively, Powell and his colleagues could point to an increasing likelihood of moving to larger rate hikes at the Fed’s late July meeting.
Although he indicated that if officials anticipate a significant probability of such an increase at the July 26-27 meeting, they could decide to act more aggressively this week.
Also, the article emphasized that borrowing costs set by markets have already risen faster than the Fed’s benchmark rate in anticipation of its policy moves. Meanwhile, he mentioned that mortgage lenders said Monday they were starting to price a 30-year fixed loan with rates above 6%, levels not reached since 2008.
Other analysts said Monday afternoon that a larger 0.75 point rate hike would cause more problems for the US central bank than it would solve by confusing investors about how the Fed reacts to the new data.
“It just opens up additional communication challenges thereafter,” said Neil Dutta, an economist at the research firm Renaissance Macro. “It suggests that the Fed is losing confidence in its forecast. We all know they were trying to catch up, but now it looks like they are panicking,” he noted.
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