It is imperative for the US Fed to raise rates and steadily tighten monetary conditions given that inflation is at a 40-year high and core PCE inflation is at a 30-year high. years, said Prasenjit K Basu, Chief Economist, ICICI Securities. .
Amid soaring U.S. inflation to 40-year highs and lingering concerns over Russia’s war with Ukraine, the U.S. Federal Reserve is poised to raise interest rates interest at the next meeting of the FOMC (Federal Open Market Committee). Markets are expecting a quarter-point hike, making it the first time since 2018 that the US Fed will hike rates. Fed Chairman Jerome Powell recently indicated that he would support a 25 basis point hike, and the broader market consensus is also in line with his view. According to CME Group’s FedWatch tool, 97.3% of participants backed a 25 basis point hike at the April meeting. However, if the Fed decides to raise rates faster than expected at the next FOMC meeting, markets could react negatively.
With inflation at a 40-year high and core PCE inflation at a 30-year high, it is imperative for the US Fed to raise rates and tighten policy steadily. monetary conditions, Prasenjit K Basu, Chief Economist, ICICI Securities told FinancialExpress.com. The Fed would aggressively raise interest rates this year, starting at the March FOMC meeting, and will be forced to raise the Fed Funds rate at each of its remaining meetings this year, he said. In fact, this will bring the target federal funds rate to 1.75% by the end of 2022, implying that there will be at least a 37.5 basis point hike to normalize the rate, added Basu.
Inflation amid a heated supply chain
The already severe supply chain disruptions have been further exacerbated by the conflict between Russia and Ukraine, and since then oil prices have risen by more than 25%. The region is one of the world’s largest exporters of commodities and energy, particularly oil, gas, raw materials, metals and wheat. “Supply-side disruptions, the recent spike in oil prices are going to have an impact on prices in the short to medium term,” said Arun Malhotra, founder of CapGrow Capital Advisors.
“If we have persistent disruptions in energy and food supplies, that’s going to put upward pressure on inflation,” Brett Ryan, senior U.S. economist at Deutsche Bank, told Reuters. “That … means consumers will have less income to spend on other goods and services, and that’s usually what slows down the economy and poses recession risks.”
Markets could react negatively if the Fed raises rates faster than expected
The pandemic, war and inflation have complicated things for the U.S. Fed, said Deepak Jasani, head of retail research at HDFC Securities, adding that traders will be looking for guidance on the pace of future price hikes. rate at the end of the meeting. “Markets are anticipating a 25bp hike at this meeting, but prices have risen to indicate a 70% chance of a bigger 50bp hike at its next meeting in May, due to the concerns about inflation,” he said. “The U.S. Fed could raise rates four to seven times over the next two years to curb economic growth depending on how the situation unfolds. The U.S. Fed has never raised rates with such a flat yield curve and such high volatility,” he added.
Globally, markets were expecting the US Fed to hike rates and therefore this is partly discounted, although if rate hikes are faster and earlier than expected or if its indication is available in his statements, global markets could react negatively, Jasani said.
Political challenge for Joe Biden
Rising inflation will also be a source of concern for US President Joe Biden’s administration, which faces midterm elections in November. ICICI Securities’ Basu said that while the United States will not be significantly affected by the Russian-Ukrainian war since it is currently a net exporter of oil and gas, it will instead benefit from rising oil prices. “High gasoline prices at gas stations will be a big political challenge for President Biden and the Democrats in the November 2022 midterm elections, so they have a strong incentive to lower headline inflation.” , he added.
The FOMC meeting is scheduled for Tuesday and Wednesday, and markets will know the US central bank’s monetary policy stance by Wednesday Washington time.