Fed Chairman Powell has been cautious about raising interest rates every time he has raised interest rates in the past four years, but this week he may change his gradual approach and raise interest rates more aggressively in order to suppress inflation and dispel concerns about stagnant inflation. . Analysts also warned investors to keep an eye out for potential volatility in the mortgage market.
The U.S. Federal Open Market Committee (FOMC) will announce its decision at 2:00 a.m. on Thursday (16th) in Taiwan, shattering U.S. inflation that has peaked due to last week’s May consumer price index (CPI) showing the largest rise in 40 years The hope is that the major Wall Street banks including Goldman Sachs, JPMorgan Chase and Barclays have predicted that the Fed will rise 3 yards (75 basis points) in one go this week, raising the target range of the federal funds rate to 1.50-1.75%.
While Powell said in May that the Fed was not actively considering raising rates by a factor of three, that possibility was not entirely ruled out. He said at the time that the base case was two rate hikes (50 basis points) each in June and July, which still depended on whether the economy developed as Fed officials expected, a clear intention to remain flexible.
Analysts said the June Michigan consumer confidence index released last Friday was key evidence that inflation expectations may be out of control, while the Federal Reserve Bank of New York’s survey of consumer inflation expectations released on Monday reinforced the prospect of a sharp interest rate hike. chance.
The odds of a three-yard gain this week reached 94.1% on Wednesday, according to CME’s FedWatch tool. Still, Citi and Bank of America forecast that the Fed will raise 2 yards this week as originally planned.
The latest forecast from Wall Street Investment Bank:
- Goldman Sachs: 3 yards each in June and July, 2 yards in September, and 1 yards in November. The rate rises to 3.25-3.50% by the end of 2022, 3.75-4.00% (terminal rate) in 2023, and 3.50-3.75% in 2024.
- JPMorgan: Up 3 yards in June, 2 yards in July and September. The end rate of this tightening cycle will be 3.25-3.50% in early 2023.
- Wells Fargo: Up 3 yards in June. The median rate is 3.375% (range 3.25-3.50%) at the end of this year, 4.125% (range 4.00-4.25%) at the end of 2023, and 3.125% in 2024.
Diane Swonk, chief economist at Grant Thornton, said the Fed’s goal is to keep inflation from becoming entrenched. “People’s behavior is changing, and it’s going to be harder to reverse it. We can’t repeat the mistakes of the 1970s. We have to find a way to reduce supply constraints.” Demand slows in a world of constraints, even if the process is painful.”
Latest Economic Forecasts: Dot Graph of GDP, Inflation and Interest Rates
In addition to the interest rate policy this time, the Fed will also release quarterly updated economic growth and inflation forecasts, as well as a point chart of interest rate forecasts showing policymakers’ views on interest rates. Powell will hold a press conference after the decision-making meeting.
The urgency of a rate hike may not yet be seen in this time-point chart, as this view is usually prepared in advance by the research team.
Powell’s goal for the U.S. economy is a soft landing, meaning low inflation and a still-robust labor market.The latest economic forecasts may show how much Fed officials are willing to put up with unemployment in order to fight inflation.
“While everyone is focusing on inflation, what we’re really looking at is whether Fed officials think a recession is needed to bring inflation down,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management.The secret code of recession is unemploymentsuperior. “
Powell will next appear at a congressional hearing on June 22 and 23 for the semi-annual report on monetary policy, so the press conference may particularly highlight the importance of curbing inflation.
Other forms of austerity?
The tightening cycle has included quantitative tightening (QT) in addition to interest rate hikes, and the Fed has already begun reducing its balance sheet of U.S. Treasuries and mortgage-backed securities (MBS) this month.
Lou Barnes, senior loan director at Cherry Creek Mortgage, said that after the U.S. May CPI report was released last week, the bond market’s view on the Fed’s monetary policy trajectory has drastically changed. MBS could not find a buyer on Friday. “The entire bond market is the most vulnerable. Links disintegrate”.
Walt Schmidt, director of mortgage strategy at FHN Financial Corp., predicts that the Fed may reveal this week that it will eventually sell MBS, rather than just stop investing at maturity.
