November 28, 2022
The market is speculating on how much the Fed will raise interest rates amid stable US inflation

The market is speculating on how much the Fed will raise interest rates amid stable US inflation

Faced with non-performing inflation in the US and this is President Joe Biden’s economic priority, the Federal Reserve (Federal Reserve) will raise its base interest rates again next Wednesday and speculate on what the market will be. This increase.

The central bank’s monetary policy committee will meet on Tuesday and Wednesday, and the market will accept a half – point increase in base interest rates, as decided at the organisation’s last meeting.

But a lot of people are speculating about a big increase of 0.75 percentage points or 75 basis points, which is embarrassing the markets. If so, this is the first time since 1994.

“Markets began to (increase) the risk (increase) by 75 basis points during the day,” Sean Osborne of Scotiabank told AFP.

The reason? Inflation plummeted in April amid fears that the worst situation is over.

But one of the inflation indexes for May, released last Friday, gave a true verification with the record of 40-year new inflation in 12 months, which stood at 8.6% on the CPI index. .

However, the central bank supports the PCE index, which was released later in the month following the measurement, and it saw data fall in the 12 months from April to April, to 6.3%, which is still more than 2%. The bank considers the economy healthy.

Sean Osborne was skeptical of the possibility of a strong rally, which could create panic in the markets. But he warned that “this is obviously a danger.”

On Friday, a quarter of market participants expected a sharp 0.75-point increase in prime rates, while three-quarters of those betting on a 0.50-point increase, CME Group said. On Saturday, 3.6% of respondents hoped the central bank would raise rates by 75 basis points.

On Monday, Wall Street fell sharply in anticipation of higher-than-expected interest rate hikes.

– Mostly in September –

“Some believe that at the June meeting the central bank may propose a surprising 75 (basic) point increase. In this situation you should never say, but we think it is not possible,” said Krishna Kuha, an economist at investment consultancy firm Evergreen.

“If the Fed opens up the possibility of a 75-point move (…), it will be higher in September,” he said.

By raising base interest rates, the central bank is forcing commercial banks to raise their own rates on loans to their customers, with the aim of controlling consumption.

“The central bank must reduce demand in response to rising supply shortages,” Diane Swong, an economist at Grant Thornton, commented in a tweet.

In March 2020, the central bank went the other way and reduced its rates to practically zero to support the economy and consumption and growth machinery in the United States in the face of the expansion of the corona virus.

Interest rates ranged from 0% to 0.25% for two years. The first increase took place in March 2022 and was a quarter of a percentage point.

They are currently in the range of 0.75-1.00%.

– Risk of recession –

The central bank needs to take a subtle balancing act to control inflation without affecting economic growth too much.

Yelena Maleyev, an economist at Grant Thornton, warns that “the more consumers spend, the more the central bank must adjust its (monetary) policy. This increases the risk of recession.”

Fed President Jerome Powell met with President Joe Biden at the White House in mid-May for an extraordinary interview dedicated to inflation.

On June 1, the central bank began to reduce the balance of its assets by purchasing debt securities after paying cash into the market during epidemics.

At the end of Wednesday’s meeting, the central bank will update its forecasts for inflation, growth and unemployment.