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Federal Reserve Board to start rate hikes with a license to become aggressive later

(Bloomberg)-The Federal Reserve will launch a months-long campaign this week to overcome inflation. This could lead Jerome Powell to move even more aggressively after Russia’s Ukrainian war pushed prices even higher.

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With the fastest consumer price index in 40 years, Powell and his colleagues, who have already shifted their focus to tightening monetary policy, now have to deal with the economic collapse of the war.

With a rise of 25 basis points on Wednesday after Powell took a rare step to publicly support such a shift, the futures market is equivalent to a tightening of about 165 basis points this year, or a rise of at least 6 quarter points. increase.

There is certainly a reason to worry about inflation, as the Russian invasion exacerbates the pressure caused by the pandemic. Food, fuel and metal costs have skyrocketed since the war began on record with gasoline alone, but the prices of many services were already high.

In anticipation of the first rate hike since 2018, Powell has been granted a hawkish license by President Joe Biden, members of the entire political spectrum, and many federal officials. Squeeze their spending power.

“Powell can’t afford to be dovish at this point,” said Derek Tan, an economist in Washington’s monetary policy analysis. “.

He argues that the Federal Reserve is agile, but a press conference after Powell’s decision on Wednesday will show how today’s high interest rates will eventually move from near zero, and authorities there. It is analyzed for clues as to how fast it moves to reach. Authorities predict that they will stop raising rates by 3% by the end of next year.

Important insights are provided by the Fed’s interest rate forecast dot plot up to 2024 and how Powell supports it.

At a meeting of the European Central Bank last week, hawkish potential surprises were shown when President Christine Lagarde announced a more accelerating reduction in monetary stimulus. The Bank of England will also raise interest rates this week at three consecutive meetings.

The US central bank has launched a tightening campaign dating back to the 1970s at the most serious negative levels of real interest rates (nominal interest rates adjusted for inflation). As long-term inflation expectations rise, we will set our policy to a more neutral setting that will not accelerate or slow growth, even if conflicts make it difficult to identify routes.

“This is really confusing,” said Tim Duy, chief US economist at SGH Macro Advisors. “Return inflation to a more rational one,” Duy said.

It depends on whether Powell signals a tack to a more hawkish or easier tightening path, or keeps his options open by talking about the need for flexibility in uncertainty. Focus on it.

It’s not a simple call. Forecasts predict that this year’s economy will slow as fiscal spending shrinks, and a University of Michigan survey on Friday shows that consumer sentiment has fallen to its lowest level since 2011, following spikes in fuel costs and inflation. It was shown to be doing. Suitable for spending.

What Bloomberg Economics says …

“It costs money for the Fed to slow down. Future inflation is best predicted by delayed values ​​of past inflation, and a more gradual Fed could mean a more aggressive Fed later. I have.”

–Anna Wong, Chief US Economist

The Federal Reserve will also want to see how their balance sheet outflow plans affect the more difficult financial situation as a result of the war. They are expected to announce the pace of their plans to shrink their balance sheets at this conference. Although the start date for starting the process has not yet been set.

A sharp slowdown in employment levels would argue that it slows the pace of tightening.

“Powell has clarified. They will steadily move to neutrality,” said Julia Coronado, founder of MacroPolicy Perspectives. “Demand resilience is a key indicator of how fast they are going.” Will be. “

At the same time, the Fed has a mission to stabilize prices, and patience is diminishing both inside and outside the central bank.

Earlier this month, Powell heard from lawmakers on both sides of the aisle that their members wanted action against inflation. And his own committee showed a more hawkish tendency.

This year’s policy voter, St. Louis Federal Reserve Bank of St. Louis Governor James Bullard, called for a “quick withdrawal of policy adaptation,” and said Christopher Waller wanted to tighten at least 100 basis points by mid-year. Governor Michel Bowman said he was ready to take “strong action” to bring inflation back to its target.

The Federal Reserve hasn’t talked about putting the economy into recession to curb inflation, but their patience is limited only by public confidence in their ability to bring inflation back to about 2% per year. I am.

“Given the soaring commodity prices, inflation expectations are now at stake,” said Sarah House, senior economist at Wells Fargo. To get the Federal Reserve’s plans on track. “

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