BMO Capital Markets chief investment strategist Brian Belsky assesses the Federal Reserve’s rate hike and market volatility.
The Federal Reserve is expected to begin raising interest rates this week for the first time in three years as policymakers seek to cool scorching inflation, a move that comes at a dangerous time for the US economy as it faces an ongoing pandemic and war. in Europe.
The US central bank will almost certainly raise its federal funds rate by at least a quarter of a percentage point at the end of its two-day policy meeting on Wednesday. Investors will also be watching closely for new forecasts showing how quickly Fed officials think they need to raise rates this year to prevent soaring inflation from taking hold.
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In December, most officials predicted that rates would hover around 2.10% by the end of 2024.
Danielle DiMartino Booth, CEO of Quill Intelligence and former adviser to the president of the Dallas Fed, predicted a “minimal” quarter-point rate hike on Wednesday, two years after the central bank cut rates to near zero to blunt the economic pain of the crisis. pandemic.
“The expected Wednesday rate hike comes at a challenging time as we currently face a slowing economy teetering on the brink of recession and runaway energy and food inflation,” she said.
The meeting came a week after the Department of Labor reported that the consumer price index rose 7.9% in February from the previous year, the fastest rise since January 1982, when inflation hit 8.4%. The CPI, which measures a variety of commodities from gasoline to health care, has risen 0.8% since January.
The smashing reading, which is above 5% for the ninth straight month, has stepped up pressure on the Federal Reserve to tame red-hot inflation with a series of rate hikes this year. Raising the federal funds rate tends to lead to higher consumer and business loan rates, which slows down the economy, forcing them to cut spending.
People shop for groceries at a supermarket in Glendale, California on January 12, 2022. ((Photo by ROBYN BECK/AFP via Getty Images) / AP Newsroom)
Fed Chairman Jerome Powell has left open the possibility of a rate hike at every meeting this year and has refused to rule out a more aggressive half-percentage rate hike, but said it’s important to be “modest and nimble.”
Asked earlier this month if the Fed is willing to do whatever it takes to control inflation, even if it means hurting growth, Powell said: “I hope history records a positive answer to your question.”
Federal Reserve Chairman Jerome Powell arrives to speak at a press conference on Tuesday, March 3, 2020 to discuss the Federal Open Market Committee’s statement in Washington. ((AP Photo/Jacquelyn Martin) / AP Newsroom)
But this week the Fed will have to walk the economic tightrope as it juggles high inflation with the COVID-19 health crisis, including new medical restrictions in major Chinese cities and a war between Ukraine and Russia. Central banks must follow the line without unintentionally crashing the economy.
Although Fed officials cautiously cabled the public about their plans to raise rates to quell inflation, the Russian invasion of Ukraine, which triggered a massive humanitarian crisis, disrupted those plans. The conflict could force the central bank to adopt a more flexible approach or risk provoking a recession.
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“The cold-blooded truth is that conditions are simply too volatile to put forward a consistent outlook at this time,” said Joe Brusuelas, chief economist at RSM. “Everything has to be placed in the context of ‘changes to come’.”