Federal Reserve expected to step up fight against inflation with large rate hike

Federal Reserve expected to step up fight against inflation with large rate hike

the Federal Reserve should step up its fight to tame the red inflation Wednesday with the first double rate hike in two decades, a move that threatens to slow US economic growth and exacerbate financial pressure on Americans.

As inflation hit a new 40-year high in March, the Fed is under increasing pressure to act more aggressively to calm demand and slow the surge in consumer prices.

THE FED HOPE FOR A SOFT LANDING, BUT HISTORY SHOWS IT WON’T BE EASY

Central bank policymakers raised rates by a quarter of a percentage point in March, but are almost certain to approve a steeper hike of half a percentage point after their two-day meeting on Wednesday. . This would mark the fastest rate hike since 2000. Many traders believe the Fed will raise rates another half point in June, and possibly July as well.

“The Fed would shock the markets if it failed to pursue more aggressive policy via a 50 basis point rate hike on Wednesday,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence and former adviser to a former president of the Dallas Fed. She noted that attention will shift almost immediately to “the number of half-point hikes the Fed expects to initiate in the course of 2022.”

On top of that, the Fed will likely begin to shrink its balance sheet by nearly $9 trillion, a move that will further tighten credit for US households. Minutes from the Fed’s March meeting suggest the central bank will begin unwinding at a maximum monthly rate of $60 billion in Treasuries and $35 billion in mortgage-backed securities. By comparison, the Fed shrank its balance sheet at a rate of $50 billion per month from 2017 to 2019.

Many economists believe the Fed is acting too late to curb inflation, with the Fed’s benchmark rate hovering in a range of just 0.25% to 0.5%. Adjusted for inflation, the key interbank rate is actually negative.

Federal Reserve Chairman Jerome Powell pauses during a news conference in Washington on January 29, 2020. (AP Photo/Manuel Balce Ceneta, File/AP Newsroom)

As a result, Fed policymakers, including the Chairman Jerome Powellhave telegraphed markets in recent weeks that they would act “quickly”, confirming that several half-point rate hikes are likely on the table in the coming months as they seek to neutralize rates at a level that neither stimulates nor harms the economy.

“It needs to move a little faster,” Powell said recently during a panel discussion at the spring meetings of the International Monetary Fund and the World Bank. “I also think there’s something to the idea of ​​front-loading whatever accommodation one feels is appropriate. So that indicates 50 basis points are on the table.”

The question now is whether the Fed can successfully engineer the elusive soft landing – the middle ground between reducing demand to calm inflation without plunging the economy into a slowdown. There are growing fears on Wall Street that central bank policymakers will succeed: Goldman Sachs, Bank of America and Deutsche Bank are among the companies forecasting a recession within the next two years.

Federal Reserve

The US Federal Reserve in Washington on April 20, 2022. (Liu Jie/Xinhua via Getty Images/Getty Images)

And last week, the Bureau of Labor Statistics reported that the economy unexpectedly contracted in the first quarter of the year, marking the worst performance since the spring of 2020, when the US economy was still in the grip of a slump. the COVID-induced recession.

“The window for the Fed to stage a soft landing has likely closed, as the economy is already starting to deteriorate before the bulk of the Fed’s tightening measures to fight inflation have taken place. happened,” DiMartino Booth said. “The last economic pillar standing is the labor market, but we are already seeing a weakening in new job openings.”

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Powell brushed off fears that further central bank tightening could trigger a recession and maintained optimism that the Fed can strike a delicate balance between controlling inflation without crushing the economy. Still, he acknowledged the difficulty of the task at hand and said it was “absolutely essential” for central bankers to restore price stability.

“Our goal is to use our tools to get demand and supply in sync, so inflation gets back in place, without a slowdown that equates to a recession,” Powell said. “I don’t think you’ll hear anyone at the Fed say it’s simple and straightforward. It’s going to be tough.”

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