Expectations that the Fed will launch large-scale interest rate hikes are increasing

Expectations are growing that the US Federal Reserve will raise interest rates by a half and a half this year, as central bank officials signal that they may soon need to step up their efforts to reduce inflation to a 40-year high. .

Wall Street economists moved this week to revise their 2022 forecast for monetary policy, predicting the Fed will double the pace of rate hikes at one or more upcoming meetings. Central bank delivered its first increase since 2018 this month, raising the federal funds rate by a quarter of a percentage point to a new target range of 0.25 percent to 0.50 percent.

Economists drew their comments from some of the most senior policymakers on the Federal Open Market Committee, who this week made clear the central bank’s willingness to take steps act positively against price pressure.

“The signals have clearly been hawkish for a while, but that has turned into the scoop in recent days,” said Simona Mocuta, chief economist at State Street Global Advisors.

Jay Powell, the Fed chair, kicked off a busy week for bank officials on Monday as he embrace The Fed is “urgently” raising interest rates to “neutral” levels that no longer stimulate demand. He also quipped that there was “nothing” stopping it from moving forward with a half-point gain in May.

John Williams, the New York Fed president and a member of Powell’s inner circle, on Friday capped this week by saying the Fed should proceed with such a move if warranted by the data. It marks his departure previous stance that there was no compelling argument for a “big step forward” at the March meeting. Several other branch presidents, including Charles Evans of Chicago, Mary Daly of San Francisco, and Raphael Bostic of Atlanta also expressed their openness to doing so.

Loretta Mester, president of the Cleveland Fed, added more hawk member such as James Bullard of St Louis and Christopher Waller, a Fed governor, in advocating a “preload” rate hike to achieve neutral or further settings in the short term. She is targeting a rate of 2.5% by the end of 2022.

“They are trying to remove the ambiguity,” said Tom Porcelli, chief US economist at RBC Capital Markets. He said a half a percentage point increase at the next meeting was a “done deal”, with at least one possibility after that.

Morgan Stanley, Goldman Sachs and Jefferies now expect the Fed to deliver a sustained half-point increase from May, followed by quarter-point adjustments at each of the four remaining meetings after the meeting. meeting in June. That would be accompanied by a $9 billion drop in the balance sheet, a process that could begin in May.

Citigroup on Friday released one of its most positive forecasts, predicting the Fed will deliver a half-point increase in its next four meetings. It will then adjust to a more typical one-quarter tempo for the remaining two gatherings for the year, such that the end point of the fund range is targeted at 3%. By 2023, Citi expects this ratio to grow to 3.75%.

“Once you hit 50 basis points, it increases the probability that you hit 50 again,” said Andrew Hollenhorst, chief US economist. “You don’t want to be seen as less dynamic if it doesn’t look better on the inflation front.”

The changing expectations have destabilized the US government bond market, causing yields to spike across all maturities. The benchmark 10-year bond traded as high as 2.5%, nearly a percentage point higher than January levels. Two-year yields at one point spiked to 2.23%, starting in 2022. at about 0.8%.

The ramping up of support for the Fed to “think bigger” – as Bullard, who disagreed on the precious March move, urged his colleagues to do this week – reflects a recognition that inflationary pressures Development is becoming more common and deeply ingrained in the economy.

“If the Fed is too slow to get there [neutral] Blerina Uruci, chief US economist at T Rowe Price said.

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