The US Federal Reserve may need to follow suit to implement further rate hikes

The US Federal Reserve may need to follow suit to implement further rate hikes – Mail Bonus

The US Federal Reserve followed its first 25-point rate hike in April 2022 with a double-barreled blow of another 50-point hike and a projected crisis in the balance sheet from May 1, 2022. there will be interest rate hikes of a similar magnitude at the next meetings. The balance sheet cut will begin with a 47.5 billion dollar monthly cut (including the Treasury and ABS) for three months and then a larger monthly cut of 95 billion dollars.

Thus, the FOMC has committed itself to accelerating the pace of normal development. However, the fact that the Fed has avoided making an aggressive move (about 75 basis points) more than has already been known (50 basis points) reflects a calibrated natural way to deliver a soft landing for the economy. Jerome Powell, the central bank’s chairman, also emphasized that there was a good chance that the US recession could be avoided or even slowed down due to continued monetary tightening as the US economy is very strong, the labor market is very sound and the central bank’s balance sheet. is in good shape.

The Central Bank drives high inflation to two important factors, a) a very tight labor market and b) increasing supply constraints due to the current war between Ukraine and Russia and a new pandemic in China. The task of price stability and the restraint of inflation expectations (1 year ahead by 5.4 per cent, 5 years by 3 per cent according to survey data) resulting from the former is complicated by external events that have focused on the parallel rise in global commodity prices. As things stand now, the combined effect of these two factors has brought inflation to a 40-year high of 8.5 per cent, the core of consumer prices to 6.5 per cent (March 2022) and the core of PCE to 5.2 per cent (February 2022), higher than the target of 2 percent. In addition, housing inflation on the Case Shiller indices is hovering around 20 percent year-on-year, reflecting housing inflation.

The serious imbalances in the labor market need to slow down on the demand side, which requires both monetary restraint and the abolition of fiscal support, which President Joe Biden has reiterated this week.

The contraction in the labor market is reflected in strong wage growth with 5.6 per cent growth every hour between years, despite the recent rise in employment to 62.4 per cent (March 2022) from 61.7 per cent in September 2021, and slightly lower than before Covid points up to 63.5 percent. The gap between the vacancies of 10.8 million and the unemployed with 5.9 million is perhaps the largest that has existed and the ratio of vacancies / unemployed 1.8x is significantly higher than 0.86x a year ago.

The Central Bank hopes that its austerity measures, together with fiscal easing, will help slow the economy enough to reduce the demand for labor and job vacancies to match the number of unemployed, thus breaking the potential wage scenario. It also assumes that the planned reduction in vacancies / unemployment rate will not lead to an increase in unemployment, which is 3.6 per cent, which is close to the historical minimum.

Overall, the central bank’s conviction of a soft landing, avoiding contraction and managing price stability has calmed the market’s anxiety, but it also includes continued restraint and a contraction in the balance sheet, which will work through the abolition of asset prices. The results of inflation will be measured with regard to the expected smoothing of core inflation and that a 4.1 per cent target will be reached by the end of 2022 and 2.6 per cent and 2.3 per cent over the next two years. It will decide whether or not to tighten the current restraint. In fact, this indicates that at this juncture the central bank does not want to react too much, as it still hopes that there will be considerable temporary factors in the current 40-year high inflation. Previous track records have shown that such hopes are lost. The risk is that there may be steeper interest rate increases in excess of the 2 per cent forecast for the end of 2022 and 2.8 per cent in 2023.

From an Indian point of view, the RBI has already started the first rate hike of 40 basis points to 4.4 per cent and a 50 basis point rise in the CRR in line with the US Federal Reserve’s restraint and in light of the significant risk of inflation. Given the US Federal Reserve’s austerity stance and inflation concerns, India will also need to continue its austerity.

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