InvestorQ : How quickly is the Federal Reserve planning to hike its raters from here on?
vaishnavi mhatre made post

How quickly is the Federal Reserve planning to hike its raters from here on?

vidhya Laxmi answered.
1 month ago

Not only is the Fed planning to go higher than before, but it is also planning to get there quicker than originally anticipated. Irrespective of market apprehensions about recession and an economic slowdown in demand, the US Federal Reserve is **** bent on being absolutely hawkish and sticking to its word. The CME Fedwatch is hinting at another 75 bps rate hike in the November meeting and another 50 bps hike in the December meeting, taking the total rate level up to the range of 4.25% to 4.50% by the end of 2022.

In recent presentations and statements, Fed officials have underlined that the Fed would target 4.5% Fed rate by the end of 2022 and possibly 5% by 2023. In short, the terminal rate of interest has gone up sharply. The current Fed rate stands in the range of 3.00% to 3.25%, but could touch 4.25% to 4.50% by December 2022 and even 5% by June 2023. One thing is certain. It would take a lot to really push the Federal Reserve off the path of 4.5%. Fed has decided to turn a deaf year to most warnings from corporates and even economists.

For now, the Fed appears quite convinced that it should not give up its aggressive hawkish stance unless inflation showed signs of falling rapidly and decisively towards 2%. In fact, the Fed has even ventured to state that it would be OK with going even higher if elevated inflation fails to show signs of easing. A lot would predicate on the consumer inflation this week. Fed believes that the 2 million barrels per day (bpd) supply cut by the OPEC Plus would most likely keep energy prices high. That would fan the flames of inflation anyways.

The other factor is the labour data. In the US, the unemployment rate has come down by 20 bps which indicates a huge purchasing power slack. That is a reason to keep a hawkish stance. Another perspective is that the Fed has been fighting inflation expectations more than inflation. Fed itself has stated time and again that if they did not get inflation down, people start believing and even building these inflation numbers into their daily lives. It is normally high expectations that fuel high inflation and it is a vicious cycle.

But, can the Fed with all its hawkishness avoid a hard landing. That looks tough but for now the Fed is confident that it can well avoid a hard landing. In the favour of the Federal Reserve, there are some positive signals. For example, non-energy commodity prices are cooling and coming down sharply. At the same time, the job vacancies and the pace of production in the factories is also slowing. These are signals the Fed was always waiting for and if it does not snowball into a recession, the Fed may still succeed in its endeavour.