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Fed gears to fight inflation with 50bp hikes
The Federal Reserve has raised its benchmark interest rate by 0.5 per cent in a bid to fight inflation; the single highest increase since May 2000.
Fed gears to fight inflation with 50bp hikes
The Federal Reserve has raised its benchmark interest rate by 0.5 per cent in a bid to fight inflation; the single highest increase since May 2000.
The Fed is targeting interest rates in a range between 0.75 per cent and 1.00 per cent and has indicated that 50bp hikes are the baseline for June and July meetings.
In a statement released with the hike announcement, the Fed noted overall economic activity is down in the first quarter, however household spending, business fixed investment and job gains have been strong.
However, it added that the Russia and Ukraine conflict is “causing tremendous human and economic hardship” which could result in “highly uncertain” implications for the US economy.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the statement read.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
T. Rowe Price US economist Blerina Uruci said she believes the Fed’s “difficult balancing act” has not changed as the upside risks to inflation from high commodity prices remain in place.
“Similarly, the headwinds to activity have not changed — tighter fiscal policy, high inflation eating into real household disposable incomes and sharply higher interest rates raising borrowing costs for businesses and consumers,” Ms Uruci said.
“Given the already high rate of inflation and the recent strong data, I think that the Fed may continue to tighten ‘expeditiously’ until downside risks to activity materialize, and they start to put downside pressure on inflation.
“I expect these risks will likely continue to frame FOMC discussions during the coming months as it also considers its chances of engineering a soft landing.”
Earlier this year, the Fed kicked off its hiking cycle with a quarter-point increase – the first since 2018.
While economists did expect this decision, what surprised was the Fed’s stated goal to get the fed funds rate to 2.8 per cent by the end of 2023.
According to Ben Powell, APAC chief investment strategist at BlackRock, “this level is in the territory of destroying growth and employment”.
The move comes only days after the Reserve Bank of Australia (RBA) chose to lift the cash rate from a record low 0.1 per cent to 0.35 per cent in its first rate hike in over a decade.
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