Fed raises rates ‘aggressively’

  Faced with higher-than-expected inflation, the Federal Reserve announced a 75 basis point rate hike on June 16, the largest single rate hike in the U.S. since 1994.
  After raising interest rates by 25 basis points and 50 basis points in March and May this year, the Fed announced in its June interest rate meeting statement that it would raise the federal funds rate by 75 basis points to the target range of 1.50% to 1.75%. Half an hour after the statement was released, Federal Reserve Chairman Powell delivered a speech to calm market sentiment, admitting that inflation risks were still rising in the past month, further exceeding expectations. . Regarding how the Fed will determine the rate of interest rate hikes in the future, he said that it mainly depends on “data”, and said that 50 basis points and 75 basis points of interest rate hikes in July are appropriate, and 75 basis points of interest rate hikes are not normal.
  After Powell’s speech, the market reaction was once positive. U.S. stocks and U.S. bonds both ushered in a strong rebound. As of the close of the day, the S&P 500 closed up 1.46%, the Dow closed up 1%, and the Nasdaq closed up 2.5%, and the yield on the 10-year Treasury bond The deepest decline in the day was nearly 19 basis points, closing at 3.29%, and the US dollar index also fell significantly below 105 points. However, in the next two days, the market’s confidence in the Fed’s eventual soft landing of the economy weakened again, concerns about an economic recession intensified, U.S. stocks fell, and hedge funds once again set off a round of short selling. In addition, the Fed’s interest rate hike has also caused the European Central Bank, Bank of England, Swiss National Bank and other central banks of developed countries or economies to follow suit.
  The market is not without expectations for the Fed’s “aggressive” interest rate hike. On June 10, data released by the U.S. Department of Labor showed that the U.S. consumer price index (CPI) rose 8.6% year-on-year in May, higher than the market’s expected 8.3%, a record high. A new high since December 1981; and the year-on-year increase of this indicator has been above 8% for three consecutive months. Excluding volatile food and energy prices, the U.S. core CPI rose 6% year-on-year in May, beating market expectations of 5.9%. An unexpected rebound in May inflation data disrupted previous expectations that U.S. inflation may have peaked.

The Federal Reserve Building in Washington, USA. Photo/Xinhua

  In the face of inflation expectations with the risk of “un-anchoring” and the Biden administration’s ability to control inflation, which has been questioned by the public, before the Fed held this interest rate meeting, some market institutions have predicted that this rate hike may be 75%. basis point. Compared with its usual rate hike (25 basis points), this rate hike is certainly extraordinary, but in fact, before the Fed started raising rates this year, the market expressed concerns about rising prices, and there is no lack of institutions. Noting that inflation is stubborn and long-term, the Fed insisted that inflation was temporary until November last year, and finally announced only a small 25 basis point rate hike in March.
  Obviously, in the face of the “impossible triangle” of inflation, economic growth, and monetary tightening, curbing inflation has become the Fed’s primary goal rather than promoting economic growth. After the June interest rate meeting, the Fed said in a statement that “the (Federal Open Market) Committee is firmly committed to restoring inflation to its 2% target”, and in its economic forecast, it lowered its forecast for real GDP growth in 2022. At the same time, the economic growth forecast for 2023 and 2024 was lowered to 1.7% and 1.9% respectively.
  For a period of time, the market has worried that the Fed may have to “sacrific” economic growth to contain inflation when it is unable to solve the current supply constraints and thus control inflation, repeating the economy of the early 1980s when Paul Volcker was in charge of the Fed. Great Recession. However, Powell emphasized in his speech that it is not the Fed’s subjective willingness to actively guide recession, and his economic forecast does not believe that the United States will fall into recession in the next two years, reflecting the current Fed’s view that the “soft landing” of the US economy is not impossible.
  Since 1965, only two of the 11 interest rate hike cycles experienced by the Federal Reserve have lowered the inflation level without triggering an economic recession. Many analysts believe that it is very difficult for the United States to achieve a “soft landing” of the economy in this round of interest rate hike cycles. .
  Zhong Zhengsheng, chief economist of Ping An Securities, analyzed: “At present, the inflation situation in the United States and the world is still severe, and the Fed and the market seem to be making ‘the worst plan’, thinking that it may be appropriate to raise interest rates to around 3.5% this year. Restrictive levels that could result in a ‘hard landing’ for the U.S. economy.”
  In his view, the market should not abandon its “soft landing” forecast prematurely at this time. “The Fed’s decision-making needs to be forward-looking and flexible, or it should slow down the pace of tightening when it judges that inflation pressures are under control, and try to avoid too much ‘brake’. The Fed will quickly raise interest rates to a ‘neutral level’ of around 2.5%. Yes, but there is still some uncertainty as to whether it will raise rates above 3.5% this year.”

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