July 17, 2024

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Endurance: The Fed is about to take a tough line on inflation

St. Louis Fed President James Bullard, one of the more hawkish members of the Fed’s regional bank chiefs, emphasized at Monday’s event that the Fed needs to “accelerate” To raise prices in order to quench economic inflation. (Inflation hawks usually push for higher rates while so-called doves prefer lower rates to stimulate growth.) Bullard suggested that the Fed could raise interest rates by as much as 75 basis points.

Federal Reserve Chairman Jerome Powell has begun to sound more hawkish in recent weeks, but he may not want to move as aggressively as Pollard would like. But it is clear that rates will likely start to rise a lot soon.

“The Fed should have seized the opportunity to raise rates earlier. There is so much it can do now, it’s already too late,” said Johann Grahn, vice president and head of ETFs at AllianzIM. “But they have to move forward with this, and unfortunately the recipe for that is to move more aggressively with higher rates.”

Traders are now pricing in a nearly 100% probability of a half-point hike at the Federal Reserve’s meeting in May, according to Widely Watched. Federal Funds Futures Trading on the Chicago Mercantile Exchange, and a more than 25% chance of a further 50 basis point increase in June.

Investors are also pricing in a more than 70% probability that the Fed will raise interest rates by three-quarters of a percentage point in June. That would leave the Fed’s short-term interest rate at 1.5%, a dramatic rise since the start of the year, when rates were still close to zero.

It cannot be stressed enough how strange it is for the Federal Reserve to raise interest rates so sharply. The last time the central bank boosted rates Half a point it was in May 2000 when Alan Greenspan was chairman of the Federal Reserve, after the dotcom bubble had peaked. The last three-quarter point increase under Greenspan also occurred in November 1994 (Greenspan retired in 2006).

The Fed is in a difficult situation right now, according to Jose Torres, chief economist at Interactive Brokers.

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“They have to tighten fast and pray that nothing breaks,” Torres added. “It’s the only policy they have.” “Delays in raising interest rates reduce the Fed’s flexibility.”

Bond investors have already discovered that rates have nowhere to go but higher. The yield on the benchmark 10-year Treasury is now hovering near 2.9%, up from around 1.5% at the end of 2021. This has added to pressure on the Mortgage rateswith a fixed term mortgage of 30 years at an average of 5%.

Recession fears are growing

Higher rates can eventually slow down red hot housing marketbut it could be a blow to the broader economy.

That’s exactly what happened when the Federal Reserve aggressively raised interest rates to 20% in the late 1970s and early 1980s under the late Paul Volcker to fight double-digit inflation. The result was a double-dip recession, then a brief recession in 1980 followed by another downturn that lasted from mid-1981 until late 1982.

With that in mind, the Fed must be prepared to turn quickly to reverse any damage that comes from higher interest rates, which the Fed has historically done. It started cutting interest rates in July 1995, for example. And in 2001, after the massive stock market crash, the Federal Reserve reversed course and cut interest rates 11 times.

Jenny Renton, a partner at Ruffer Investment Management, fears the Fed is likely to be too aggressive with raising rates as it is of late trying to get inflation toothpaste back into the tube.

She is concerned that the Fed’s rate hike could lead to a recession. This means that the Federal Reserve may need to cut interest rates quickly again, which leads to more volatility.

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She added: “People are talking about a policy mistake coming from the Fed, but it has already happened. The Fed has been way behind the curve with inflation. Now they will have to respond to the pressures of the recession.”

However, others believe that the Fed should remain more focused on inflation concerns than concerns about an eventual slowdown. After all, the job market is still tight, with the unemployment rate at just 3.6%…not far from a 50-year low. The Fed has a so-called double mandate: it needs to focus on price stability And maximum employment.

“I think that [the Fed] Brad Conger, Deputy Chief Investment Officer at Hirtle Callaghan & Co. , in an email to CNN Business, said, “Additional pressure on prices from the Ukraine war has made this account even more stimulating.”

“Before the war, it was reasonable for inflation to gradually recede to the 3% range. Given the effects of the war and the Covid outbreak in China now, we would be lucky to see CPI inflation below 5%,” Konger added. .