Taming inflation has been the FED’s predominant subject of concern. These past few months saw it take an aggressive stand against it. With another potential rate hike en route, the economy may be in for severe pain.
Fed To Raise Interest Rates Higher
Wednesday should see the FED tackle inflation on a more hawkish note. It will be the third consecutive rate hike to curb inflation. Inflation, which has now hit its 40-year high since 1980, could crumble the US economy soon.
Some investors are pricing interest rates at 75 basis points. Meanwhile, some believe the odds of 100bps are high. So, generally, FED is expected to raise the interest rate by either 75bps or 100bps at its meeting.
However, Wall Street has kept its eyes peeled for what is to come. During the coming FOMC meeting, which will last two days, FED will decide on the next step. They will upload economic predictions after the last one in June.
The update should contain a more hostile move to combat inflation than initially expected. Before August’s CPI data revealed inflation had jumped higher, economists believed the economy was healing. Therefore, they presumed the next rate hike at 50bps.
Unfortunately, the reverse was the case as inflation only went up. And this could cause pain for the economy because the higher the rate increases, the closer the economy gets to a recession.
So far, the central bank has increased rates to retard the economy and beat down prices. Businesses have slowed down but are faring well. People are getting employed, pay is rising, and inflation is uncompromising.
More Pain For The Economy As Inflation Jumps
Officials pledged to remain unrelenting in their effort to repress increasing prices. Although, that may result in ‘pain’ for everyone, according to the words of the FED Chair. Wall Street termed FED’s resolve as hawkish.
Their actions will line up with whatever the economy exhibits. It will show their level of devotion to cleansing the economy.
Gennadiy Goldberg said that the FED is not making much progress dallying the economy. Whatever they do this week won’t make much difference eventually.
Federal Reserve Chairman, Jerome Powell, would have another public speech following FOMC’s meeting. During his oration, he will possibly reaffirm his promises to takedown prices however possible. As usual, he would restate that the process would cause pain.
Meanwhile, some analysts noted that if central banks remain consistent in its hawkishness, it could lead to a painful outcome.
Paul A. Volcker, Fed Chairman in the 1980s, employed a similar approach to inflation then and wound up sinking the economy. Inflation had similarly expanded to its level today, causing the Fed Chair to get aggressive. Only to discover that it severed the economy even more.
Analysts opined that if the FED pushes interest rates higher in the months ahead, 2022 could see inflation close at 4 percent.