The Federal Reserve hiked interest rates by 75 basis points today, as the US central bank took action against soaring inflation.
Higher-than-expected consumer price inflation rate published last week, which saw US prices rising 8.6 per cent in May, forced the Fed to be more aggressive than the 50bps hike initially forecast.
The hike, which took the Fed’s fund rate to a range of 1.5 per cent and 1.75 per cent, is expected to be one of 10 between now and early 2023, bringing US rates to above 3 per cent by the end of the year.
Tomorrow the Bank of England’s monetary policy committee will reveal its latest base rate decision, widely forecast to be a 0.25 percentage point move up to 1.25 per cent.
Rate: All eyes will be on the press conference by Chair of the Federal Reserve Jerome Powell
Janet Mui, head of market analysis at wealth manager Brewin Dolphin, said: ‘This shows the Fed is desperate to restore its inflation-fighting credibility, after keeping policy too loose for too long.
‘In the Fed’s mind, the risk of unanchored inflation expectations (e.g. wage-price spiral of the 1970s) dwarfs the pain of falling stock prices and a potential recession.
‘The Federal Reserve now sees interest rates at 3.4% by the end of 2022 (meaning at least half-point hikes at all the remaining four FOMC meetings this year) and 3.8% by end of 2023.’
Nick Chatters, investment manager at Aegon Asset Management, said the Fed’s next hike, its biggest since 1994, comes not only in the face of a higher-than-expected CPI print but as ‘longer term inflation expectations are starting to look unanchored’.
He added: ‘The Fed are usually steady when we get one data point which is out of line. However, the inflation data surprises last week are not one data point, rather an acceleration of the trend.’
Amid the rush to hike rates, US economist at PIMCO Allison Boxer said markets will be concerned about the ‘serious risk of overtightening’ and ‘ultimately greater downside risk to our already stall-speed growth outlook’.
She said: ‘I am very hopeful that Powell will be able to inspire confidence that the Fed will be able to engineer a “soft landing” — by being sufficiently hawkish but responsive to evolving data.
‘From my perspective, the key is the Fed remaining data dependent. It’s not just about inflation but growth too; in my view, being flexible balancing those two mandates will increase the odds of a soft landing.’
CPI inflation would have last been above the April 2022 level of 9 per cent in March 1982 – when it was 9.1 per cent, ONS modelled figures show
Inflation is at a more than 40-year high – which has caused voters to sour on the economy, despite a mixed recovery after 2020’s pandemic-induced downturn that has led to robust hiring and a healthy 3.6% unemployment rate
The Fed’s move will no doubt be closely watched by the Bank of England’s Monetary Policy Committee and governor Andrew Bailey as the bank prepares to deliever its own decision on interest rates on Thursday.
Markets are currently pricing a 25bps hike to 1.25 per cent, with the Bank of England having signalled in May, following a 40-year high CPI print of 9 per cent, that it would continue to hike gradually to 2.5 per cent by mid-2023.
However, Tom Higham, head of Hargreaves Landsdown Active Savings, said markets currently expect a faster pact of rate rises than the bank has signalled.
He added: ‘Signals of unrelenting price rises, particularly in food and energy, over the last few weeks have caused the market to rethink.
‘Interest rate markets are bringing forward the BoE’s rate expectations, pricing in rises at every MPC meeting getting to 2.5 per cent by the end of 2022 and to continue climbing beyond the BoE indicated 2.5 per cent peak in 2023.
‘The BoE is stuck between a rock and a hard place. Rise rates too slowly and they are accused of not doing enough to combat inflation.
‘Hike rates too quickly and they risk destroying too much demand, slowing growth and tipping economy faster and deeper into a recession.’
But investors appear split on the BoE’s best course of action, with 48 per cent of respondents to an interactive investor poll on Wednesday calling for a rate hike of 50bps or more.
The survey of 1,249 investors between 13 and the morning of 14 June, found 33 per cent want the Bank of England to up the base rate by 50bps, while 15 per cent said the rate hike should be even higher. Just 27 per cent supported a 25bps rate rise.
Myron Jobson, of Interactive Investor, said: ‘The BoE is expected to hike interest rates for the fifth consecutive month in a row on Thursday.
‘The scale of the inflation challenge is real, and higher interest rates should result in a further uptick in savings rates from rock bottom levels, which would benefit savers, if not borrowers.
‘Faced with inflation running at a four-decade high of 9 per cent and predicted to hit double digits soon, the BoE is under pressure to take decisive action without triggering a recession.’
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