English
Market News The United States may raise interest rates in "big strides" to curb inflation
The United States may raise interest rates in "big strides" to curb inflation
The Federal Open Market Committee (FOMC) signaled a 50-basis-point rate hike at the next two meetings, with rates likely to move beyond neutral. Fed officials believe it is important to move quickly to a neutral rate policy, and a further restrictive policy stance will likely become appropriate given the changing economic outlook and risks. This also means that some Fed officials believe that another rate hike in September is possible and necessary.
2022-05-30
10046
Recently, the Federal Reserve released the minutes of its May policy meeting. The Federal Open Market Committee (FOMC) signaled a 50-basis-point rate hike at the next two meetings, with rates likely to move beyond neutral.
Notably, inflation was mentioned 60 times in the minutes, showing Fed officials' concerns about rising prices.
The central banks of New Zealand and South Korea also announced another rate hike, respectively, as the Federal Reserve stepped up its pace of tightening monetary policy. The Reserve Bank of New Zealand announced on May 25 that it raised its benchmark interest rate by 50 basis points to 2% again. This is the RBNZ's fifth consecutive rate hike since October 2021 and the second consecutive rate hike by 50 basis points since April this year.
On May 26, the Bank of Korea raised its benchmark 7-day repo rate by 25 basis points to 1.75%, its fifth rate hike since August 2021.
U.S. rate hikes accelerate
In addition to saying they will raise rates by 50 basis points at each of the next two meetings, Fed officials also believe that a rapid shift to a neutral rate policy is important, and that a further restrictive policy stance is likely depending on the changing economic outlook and risks will become appropriate. This also means that some Fed officials believe that another rate hike in September is possible and necessary.
The Fed will also hold five interest rate meetings this year on June 15, July 27, September 21, November 2 and December 14.
On the balance sheet, the minutes showed that Fed officials at the meeting laid out a plan to shrink the balance sheet by $9 trillion starting in June. The balance sheet will be reduced to $95 billion per month, including $60 billion in Treasury bonds and $35 billion in mortgage-backed securities (MBS).
"I need to see months of inflation data continuing to decline, and if inflation doesn't moderate by September, then the pace of rate hikes may need to be accelerated," said Cleveland Regional Fed President Loretta Mester.
At the May meeting, officials at the meeting did not reach a consensus on how long this cycle of rate hikes would last. The current mainstream view of Fed officials is that the Fed will further increase the federal base interest rate to 3% in 2023. If inflation does not show signs of easing, the interest rate needs to rise further to around 4% in the next 12 to 18 months.
Inflation may have peaked
As can be seen from the minutes, inflation was a hot word at the May meeting. Inflation remains well above its long-term target, Fed officials said, with inflationary pressures evident across a range of goods and services.
While they believe that higher interest rates and the gradual easing of supply chain problems will help control inflation, on the other hand, the Russian-Ukrainian conflict and the ongoing new crown epidemic may further exacerbate inflation.
The US Department of Labor released a report showing that the core consumer price index (that is, excluding food and energy) rose 6.2% year-on-year in April, while the consumer price index rose 8.3% year-on-year. While the figure is still running at a 40-year high, it has slipped slightly from March's 8.5 percent inflation rate.
For now, though, the Fed prefers to measure inflation using the core personal consumption expenditures price index (PCE). Because PCE does not calculate a series of statistical differences such as fuel prices, the increase in PCE is usually smaller than the consumer price index CPI, which has been 5.2% and 4.8% in the past two months.
The Congressional Budget Office (CBO) report released on the 25th expects inflation to be well above the Fed's 2% target between 2022 and 2023, but it also said prices may not rise faster than current level. By the end of 2022, PCE should fall to 3.8%.
stock market stress
Some officials at the interest rate meeting also pointed out that the Fed's monetary tightening policy may increase the pressure on the securities market.
U.S. stocks are in the midst of their longest losing streak in decades. The S&P 500 is down 20% this year. Fund managers, private equity investors and financial communicators are already cautious about stocks at March 2020 levels, according to data from multiple survey agencies.
David Rosenberg, president and chief economist at Rosenberg Research, believes that it will be difficult for U.S. stocks to bottom until the Fed completes monetary policy tightening, or until the Fed convinces investors that it will succeed in reducing inflationary pressures without triggering a recession.
Goldman Sachs strategist Vickie Chang pointed out in a report last week that the Fed's signal to end monetary policy tightening can stop the sell-off in U.S. stocks, and the Fed may not send that signal until a recession is already evident.
Article source: International Finance News
Notably, inflation was mentioned 60 times in the minutes, showing Fed officials' concerns about rising prices.
The central banks of New Zealand and South Korea also announced another rate hike, respectively, as the Federal Reserve stepped up its pace of tightening monetary policy. The Reserve Bank of New Zealand announced on May 25 that it raised its benchmark interest rate by 50 basis points to 2% again. This is the RBNZ's fifth consecutive rate hike since October 2021 and the second consecutive rate hike by 50 basis points since April this year.
On May 26, the Bank of Korea raised its benchmark 7-day repo rate by 25 basis points to 1.75%, its fifth rate hike since August 2021.
U.S. rate hikes accelerate
In addition to saying they will raise rates by 50 basis points at each of the next two meetings, Fed officials also believe that a rapid shift to a neutral rate policy is important, and that a further restrictive policy stance is likely depending on the changing economic outlook and risks will become appropriate. This also means that some Fed officials believe that another rate hike in September is possible and necessary.
The Fed will also hold five interest rate meetings this year on June 15, July 27, September 21, November 2 and December 14.
On the balance sheet, the minutes showed that Fed officials at the meeting laid out a plan to shrink the balance sheet by $9 trillion starting in June. The balance sheet will be reduced to $95 billion per month, including $60 billion in Treasury bonds and $35 billion in mortgage-backed securities (MBS).
"I need to see months of inflation data continuing to decline, and if inflation doesn't moderate by September, then the pace of rate hikes may need to be accelerated," said Cleveland Regional Fed President Loretta Mester.
At the May meeting, officials at the meeting did not reach a consensus on how long this cycle of rate hikes would last. The current mainstream view of Fed officials is that the Fed will further increase the federal base interest rate to 3% in 2023. If inflation does not show signs of easing, the interest rate needs to rise further to around 4% in the next 12 to 18 months.
Inflation may have peaked
As can be seen from the minutes, inflation was a hot word at the May meeting. Inflation remains well above its long-term target, Fed officials said, with inflationary pressures evident across a range of goods and services.
While they believe that higher interest rates and the gradual easing of supply chain problems will help control inflation, on the other hand, the Russian-Ukrainian conflict and the ongoing new crown epidemic may further exacerbate inflation.
The US Department of Labor released a report showing that the core consumer price index (that is, excluding food and energy) rose 6.2% year-on-year in April, while the consumer price index rose 8.3% year-on-year. While the figure is still running at a 40-year high, it has slipped slightly from March's 8.5 percent inflation rate.
For now, though, the Fed prefers to measure inflation using the core personal consumption expenditures price index (PCE). Because PCE does not calculate a series of statistical differences such as fuel prices, the increase in PCE is usually smaller than the consumer price index CPI, which has been 5.2% and 4.8% in the past two months.
The Congressional Budget Office (CBO) report released on the 25th expects inflation to be well above the Fed's 2% target between 2022 and 2023, but it also said prices may not rise faster than current level. By the end of 2022, PCE should fall to 3.8%.
stock market stress
Some officials at the interest rate meeting also pointed out that the Fed's monetary tightening policy may increase the pressure on the securities market.
U.S. stocks are in the midst of their longest losing streak in decades. The S&P 500 is down 20% this year. Fund managers, private equity investors and financial communicators are already cautious about stocks at March 2020 levels, according to data from multiple survey agencies.
David Rosenberg, president and chief economist at Rosenberg Research, believes that it will be difficult for U.S. stocks to bottom until the Fed completes monetary policy tightening, or until the Fed convinces investors that it will succeed in reducing inflationary pressures without triggering a recession.
Goldman Sachs strategist Vickie Chang pointed out in a report last week that the Fed's signal to end monetary policy tightening can stop the sell-off in U.S. stocks, and the Fed may not send that signal until a recession is already evident.
Article source: International Finance News
Bonus rebate to help investors grow in the trading world!
Or try Free Demo Trading
