Hike rates

Putting Out the Fire: Fed Set to Hike Rates to Tame Inflation

Washington: Soaring fuel, food and housing prices have pushed US inflation to a four-decade high, and Russia’s invasion of Ukraine has made matters worse, so the Federal Reserve is bracing to act this week.

But the central bank’s efforts to put out the fires of inflation will be complicated by the prospect that war and far-reaching sanctions on Russia will disrupt trade flows and undermine America’s economic recovery.

The policy-setting Federal Open Market Committee is holding its two-day policy meeting this week, with an announcement slated for Wednesday when it is set to begin raising the benchmark lending rate that has been cut to zero. at the start of the Covid-19 pandemic in March 2020.

It would be the first in a series of rate hikes, but amid growing uncertainty, some economists believe policymakers may be acting less aggressively than expected as they weigh competing forces on the economy.

“The Fed is being pulled in two different directions by the massive increase in energy prices that has happened in recent weeks,” David Wilcox, a former senior adviser to three successive Fed chairs, told AFP.

While rising inflation justifies the tightening measures, “the reduction in purchasing power that households are experiencing (…) would call for a more accommodating policy, a more cautious approach,” said Wilcox, now at the Peterson Institute for International Economics and Bloomberg. Economy.

Markets forecast about six rate hikes this year, but Grant Thornton chief economist Diane Swonk predicts seven, while Wells Fargo raised its forecast from five to six, which would still leave the key rate below. by 2%.

– ‘Stunned’ – Ahead of Russia’s invasion of Ukraine, some economists – and even some Fed officials – said the first leg of the tightening cycle could be a half-point hike to send a strong signal to the markets that the central bank was committed to preventing inflation from spiraling out of control.

But Fed Chairman Jerome Powell last week said he intended to call for a quarter-point hike – a surprisingly direct comment from a central bank chief, who usually keeps his plans close to the vest. .

Wilcox said he was “thunderstruck” by the statement which stifled speculation of a more aggressive move.

While Wilcox remains cautiously optimistic about falling inflation, he stressed that the Fed will need to be “absolutely clear” that it will act as forcefully as necessary should price pressures accelerate.

And in the short term, economists warn that things will get worse before they get better.

“The disruptions we’re seeing are fueling a well-lit fire of inflation that goes far beyond the energy sector and could affect much more of our daily lives,” Swonk said.

“The timing couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s.”

Supply chain issues caused shortages of key commodities as the global economy returned to normal following the pandemic, and although increases were initially driven by cars and housing, prices for energy have also increased, particularly over the past month.

The annual consumer price index in February reached 7.9%.

“Almost everything that constitutes inflation is skyrocketing,” Adam Sarhan of 50 Park Investment told AFP, adding that he feared it was the kind of rapid increase that could lead to a recession.

The IMF warned last week that the fallout from the war will slow global growth, but the US economy is entering the latest crisis from a position of strength with low unemployment after rising 5.7% last year. .