As expected by the market, the Federal Reserve (Fed) has aggressively hiked interest rates to curb rising inflation affecting the United States. The rise was in line with what traders believed. The agency also raised its inflation estimate and lowered its growth forecast for the US economy this year.
Thus, the Federal Reserve raised the cost of borrowing by 75 basis points, in a range between 1.5% and 1.75%. It was the largest rate hike since November 1994, when the US central bank made the same hike as on Wednesday.
“The decision taken could give greater confidence to the market in the face of the next meetings, in which a similar pace could be envisaged during the third quarter of this year,” said Renato Campos of Admiral Markets.
Felipe Alarcón, from EuroAmérica, commented that “it seems to me that this hike is quite 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 future.
The Federal Open Market Committee’s decision was not unanimous as Kansas City Fed President Esther George favored a hike of just 50 basis points. At the May meeting, the agency had already raised rates by 50 points due to escalating inflation in the world’s main economy in recent months. In the fifth month of the year, 12-month inflation hit 8.6%, a 40-year high.
“Inflation remains very high, reflecting the pandemic-related supply-demand imbalance, rising energy prices and broader price pressure,” the Fed’s statement said after its two-day meeting. . .
He also argued that “the committee is firmly committed to bringing inflation back to its 2% target.” Additionally, he cited the war in Ukraine and lockdowns in China as sources of inflation.
Consistent with the above, the Fed also raised its target interest rate outlook for the end of this year and next year, saying it expects less inflation relief in the near term than she hadn’t estimated it three months ago.
In these new projections delivered by the agency, the median expectation is that its benchmark key rate will rise to 3.4% by the end of 2022, well above the 1.9% projected in March, and that it will be 3.8% at the end of 2023. , above the 2.8% estimated in March. In turn, the rate at the end of 2024 would be 3.4%, from 2.8% in March, and raised the long-term key rate to 2.5%, from 2.4% previously.
Meanwhile, inflation expectations for the United States stood at 5.2% for the current year, down from 4.3% previously. As for the unemployment rate, it should be 3.7% at the end of 2022, against 3.5% forecast in March. The agency also lowered its estimate of economic growth for this year from 2.8% to 1.7%.
That ends weeks of Fed rate hike speculation.
“We were expecting a rally of this magnitude at today’s meeting, as the Fed is still far from a contraction level. They could continue to rise by another 75 basis points at the next meeting. Overall, it is clear that we are moving to more restrictive global financial conditions, in the face of a clear deterioration in the external impulse of the Chilean economy,” said Vittorio Peretti, economist at Itaú.
After the Fed’s announcement, and as usual after every meeting, the market listened carefully to Jerome Powell’s words. Although the chairman of the Federal Reserve clarified 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 like the most likely,” Powell told a news conference.
And he stressed that the organization continues to see upside risks to inflation, and that reducing it is essential.
“Since the Fed meeting in May, inflation has surprised on the upside. We are very attentive to the risks of high inflation, and strongly committed to reducing it,” he added.
Finally, he indicated that it is desirable to raise rates towards the neutral level.
“I think in July we could see another 75 basis point hike, especially if the inflation data doesn’t loosen up like I think it will,” Alarcón said.
Francisca Pérez, of the Bci, said that “we expect the Fed to increase by 50 basis points at the next meeting if the inflation which will be known soon is in line with what is expected, and by 75 points if the CPI turns out to be higher than expected, but in general the trajectory they show for rates is well in line with our scenario.
The market bet is that rates continue to rise in the United States.
“Rate hikes in the United States will continue, I think. There will be one or two more rate hikes, because inflation will not subside automatically and it must be brought under control quickly. This is going to have an impact on the dollar, which will continue to rise,” commented Cristián Cerna, senior management managing partner.
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