Fed applies most aggressive rate hike in almost three decades and cuts growth forecast for the US

As expected by the market, the Federal Reserve (Fed) applied an aggressive rate hike of interest to curb rising inflation in the United States. The rise was in line with what traders were estimating. The organism also raised its inflation estimate and reduced his growth forecast for the US economy this year.

Thus, the Federal Reserve raised the cost of borrowing by 75 base points, to a range between 1.5% and 1.75%. It was the biggest rise in rates since November 1994, when the US central bank carried out the same increase as this Wednesday.

“The decision carried out could give greater confidence to the market in the face of the next meetings, in which a similar rhythm could be considered during the third quarter of this year,” said Renato Campos of Admiral Markets.

Felipe Alarcón, from EuroAmérica, indicated that “it seems to me that this hike is totally correct. The markets needed a clear message from the Fed that it is going to take charge of the inflationary problem, beyond the fact that this type of movement generates volatility in the markets and that it can increase the probability of a recession in the US. future”.

The decision of the Federal Open Market Committee was not unanimous, since the president of the Kansas City Fed, Esther George, was in favor of a hike of only 50 basis points. At the May meeting, the agency had already raised rates by 50 points due to the inflationary escalation that has been experienced in the world’s main economy in recent months. In the fifth month of the year, inflation in 12 months reached 8.6%, a record level in 40 years.

“Inflation remains very high, reflecting the supply-demand imbalance linked to the pandemic, higher energy prices and broader price pressure,” the Fed statement said after its two-day meeting. .

He also argued that “the committee is firmly committed to returning inflation to its 2% target.” In addition, he cited the war in Ukraine and the lockdowns in China as sources of inflation.

In line with the above, the Fed also raised its target interest rate forecasts for the end of this year and next, saying it expects less short-term inflation relief than it estimated three months ago.

In these new projections delivered by the agency, the median expectation is that its reference policy rate will rise to 3.4% by the end of 2022, well above the 1.9% projected in March, and that by the end of 2023 it will be 3.8%, above the 2.8% estimated in March. In turn, the rate at the end of 2024 would be 3.4%, compared to 2.8% in March, and raised the long-term policy rate to 2.5%, from the previous 2.4%.

Meanwhile, the inflationary expectation for the US stood at 5.2% for the current year, compared to the previous 4.3%. As for the unemployment rate, it is projected to be 3.7% at the end of 2022, up from 3.5% forecast in March. The agency also lowered its estimate of economic growth for this year from 2.8% to 1.7%.

It ends like this with weeks of speculation around rate hike by the Fed.

“We expected a rise of this magnitude at today’s meeting, since the Fed is still far from a contractionary level. They could continue to rise another 75bps at the next meeting. All in all, it is clear that we are transitioning to more restrictive global financial conditions, in the face of an evident deterioration in the external impulse for the Chilean economy,” said Vittorio Peretti, economist at Itaú.

After the Fed’s announcement, and as usual after each meeting, the market listened carefully to Jerome Powell’s words. Although the president of the Federal Reserve made it clear that there are still increases in the rate, he was not in favor of larger doses.

“For the next Fed meeting, a rate hike of 50 or 75 basis points seems to be the most likely,” Powell told a news conference.

And he pointed out that the organization continues to observe upward risks for inflation, and that it is essential to reduce it.

“Since the Fed meeting in May, inflation has surprised to the upside. We are very alert to the risks of high inflation, and strongly committed to reducing it,” he added.

Finally, he indicated that it is desirable to increase rates towards the neutral level.

“I think that in July we could see another rise of 75 bp, especially if the inflation data does not loosen as I think it will be the case,” Alarcón analyzed.

Francisca Pérez, from Bci, stated that “we expect the Fed to increase by 50 basis points at the next meeting if the inflation that will be known soon is in line with what is expected, and by 75 basis points if the IPC turns out to be above the expected. But in general, the trajectory they show for rates is well in line with our scenario.”

The market’s bet is that rates continue to rise in the United States.

“The rate hike in the US is going to continue, I think. There will be one or two more rate hikes, because inflation is not going to subside automatically, and it needs to be brought under control quickly. That is going to impact the dollar, which is going to continue to rise”, commented Cristián Cerna, managing partner of Senior Management.

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