Powered by MOMENTUM MEDIA
Powered by momentummedia
nestegg logo

Invest

Fed gears to fight inflation with 50bp hikes

  • May 05 2022
  • Share

Invest

Fed gears to fight inflation with 50bp hikes

By Neil Griffiths
May 05 2022

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

author image
  • May 05 2022
  • Share

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 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.

Advertisement
Advertisement

“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.

Fed gears to fight inflation with 50bp hikes

“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.

Forward this article to a friend. Follow us on Linkedin. Join us on Facebook. Find us on X for the latest updates
Rate the article

more on this topic

more on this topic

More articles