Fed May Have to Stick to Half-Point Rate Increases

On Friday, Loretta Mester, the President of the Federal Reserve Cleveland, stated that the central bank may have to continue raising interest rates at the same pace till September unless they would find ‘compelling’ evidence showing that inflation had hit its peak. Along with other policymakers of the Fed, including Chairman Jerome Powell, Mester has already signaled that they are going to increase the interest rate by half a point again in June, as well as July, just like they did the previous month. Mester said that when the September meeting happens, they will look for compelling evidence of a cooldown in inflation.

If they do not have the necessary evidence, then they could vote for a 50-basis point hike in that meeting too. But, she did say that there was no reason for the US central bank to make that decision right now because they do not have enough data so far that could convince them about a decline in inflation. If they are able to see evidence that inflation is going downwards, then they would move towards a 25-basis point increase, but Mester said that she did not believe it would happen.

The central bank is scheduled to have its next meeting from June 14th to June 15th and Mester was the last official of the Fed to be permitted to speak publicly. Now, until the time of the meeting, there will be a complete communications blackout. Lael Brainard, the Vice Chairman of the Federal Reserve, had also spoken on Thursday and said the same thing. Essentially, she is also not in favor of pausing the hike in interest rates come September. Those who trade futures of interest rate have priced in expectations that the rate would be increased to somewhere between 2.75% and 3% by the Federal Reserve by the end of the year.

As compared to today, the rate would be a complete two percentage points higher. Chief executives and investors have also shared concerns that such aggressive monetary policy tightening, combined with 40-year high inflation, could lead to weak economic growth. Elon Musk, the chief executive of Tesla, had stated that he did not have a good feeling about the economy. Likewise, Jamie Dimon, the chief executive of JPMorgan Chase & Co said people should prepare for an economic ‘hurricane’. Mester said that while she didn’t see a hurricane, there was a high chance of recession.

She added that this was not just because of the hike in interest rates, but also because the Russian invasion of Ukraine would result in a slowdown in Europe. Furthermore, supply chains had also become tangled because of the COVID-19 lockdowns in China. But, she added that the Federal Reserve was going to continue tightening the monetary policy. She said that the goal was to increase interest rates to see how that affects demand. Their aim was to temper demand as much as possible and Mester believes that the Fed would be able to slow down the economy without creating any major problems.

Leave a Comment