InvestorQ : How do you read Powell’s recent statements on Fed rates and is it really feasible?
diksha shah made post

How do you read Powell’s recent statements on Fed rates and is it really feasible?

Aditi Sharma answered.
11 months ago

At the IMF Spring Meet 2022, Jerome Powell hinted at 50 basis points rate hike in the May-22 FOMC meet. Powell also indicated towards 2 more hikes of 50 bps each apart from the May hike. That would mean that Fed rates get closer to 2.75% to 3.00% by the end of calendar year 2022. That is a lot more hawkish than expected due to 8.5% inflation.

Powell did not just stop at talking about hiking rates. He underlined that the Fed would combine rate hikes with systematic bond book unwinding of $95 billion a month. Fed will push for a combination of rate hikes and rapid liquidity tightening. The question is, can the Fed Chair afford to be as hawkish in his action as he sounds in his speeches.

One thing is certain that the action in May looks very likely as there is lot of Fed credibility at stake. A 50 bps rate hike in May-22 policy almost looks like done deal with just 2 weeks to go for the May policy. Fed is also likely to start bond book. Fed would probably want to bite the bullet in this case and see the market response. The question is; what after that?

Can the Fed really walk the talk through 2022? Tightening rates up 3.00% by end of the year 2022 means a lot of tightening and growth impact. Fed is assuming or hoping that inflation will come under control, without hitting growth; which is not practical. The bigger concern is financial divergence with the ECB, BOJ etc with Lagarde of the ECB unwilling to tighten. Eventually, Fed may go the whole hog in, but beyond that it is not too clear.