0.75% rate hike: Fed ready to risk recession to counter inflation

Raising interest rates by 75 basis points to 1.75% at the June meeting on monetary policy, the Federal Reserve tells us that it is ready to risk a recession due to inflation. The central bank has not only increased by the largest amount since 1994, but, according to Fed Chairman Jerome Powell, rates could rise by 50 or 75 bp. at the next meeting. According to his scatter chart, a 50-point raise is expected at each meeting by the end of the year. Unable to control inflation with the help of previous measures, it is doing everything possible to reverse the rise in prices and lower inflation. Powell attributed today’s sharp growth to real GDP growth this quarter, strong consumption, a tough labor market and strong wage growth.

Unfortunately, according to its own economic forecasts, the Fed expects growth to be weaker, unemployment and inflation to be higher, which is a recipe for recession. In fact, his forecast for a rate cut in 2024 suggests that he also expects a significant slowdown in growth. The retail report released today shows {{ecl-256 |||} that costs have been negative for the first time this year. Retail sales fell 0.3% in May, which was a big surprise: growth slowed to 0.1% after a downward revision of 0.8%. Americans are plunging into their savings to withstand rising prices, in line with the recent fall in personal savings, which has fallen to its lowest level since 2008. Investors should prepare for the deterioration of significant data in the coming months. However, prices have risen as investors are optimistic about the Fed’s commitment to fighting inflation, and the Fed is finally seeing a way out of rising prices. Bond yields fell, pulling the price down.
Top 10 FOMC takeaways in June 2022

1. The Fed has raised 75 basis points, the largest step since 1994.
2. The next meeting of the Fed may be another increase of 50 or 75 basis points.
3. Disagreement to reduce the rate by 50 bp (George)
4. The interest rate forecast has changed from 1.9% to 3.4% = the rate increases at each meeting.
5. The inflation forecast will increase from 3.4% to 5.2% in 2022.
6. The growth forecast has been reduced from 2.8% to 1.7% for 2022 7.
7. The unemployment rate has been increased from 3.5% to 3.7% in 2022.
8. Forecasts show that rate cuts will begin in 2024
9. The Fed does not know how limited its policy should be.
10. Powell expects a soft landing, as costs and the labor market are strong.

The FOMC meeting is over, but now is not the time to calm down. There are still three main announcements from central banks this week – from the National Bank of Switzerland and the Bank of Japan. Although no change is expected from SNB and the Bank of Japan, the Bank of England is expected to join the Fed in raising interest rates. Inflation in the UK is close to double digits, but unlike the Fed, the Bank of England does not have the flexibility to raise interest rates by 75 basis points. The economy is shrinking, according to the latest GDP report, which showed that growth has fallen to its fastest pace in more than a year. The unexpected downturn underscores the challenges facing the Bank of England, which expects rising prices to further dampen growth in the coming months. The report on jobs in the UK added weakness in the economy, slowing wage growth and rising unemployment. Although the Bank of England will reaffirm its hawkish stance after tightening monetary policy on Thursday, the more modest move should limit demand.

Inflation is also the biggest problem for the Swiss National Bank. CPI indicators are at their highest level since 2008. But only this morning, the company lowered its economic forecasts amid prolonged geopolitical uncertainty and rising food and energy. Concerns are that growth could slow further if Russian gas supplies remain intermittent. This downward revision is a preliminary decision to keep interest rates unchanged. However, the SNB is still under pressure to join its counterparts in normalizing monetary policy.

It may be trading at its lowest level in decades against the US dollar, but the Bank of Japan has promised not to raise interest rates. In recent weeks, its 0.25% return limit has been called into question. This was met by an aggressive purchase of bonds. This week’s question is whether the Bank of Japan deems it necessary to adjust its yield limits. The weak yen is a major problem for the Japanese economy, especially in high inflation, as it increases the cost of imported fuels and raw materials. Although Bank of Japan officials may complain about the exchange rate, the intervention is a decision of the Ministry of Finance.

In addition to these rate decisions, a report on New Zealand’s GDP for the first quarter and Australian employment will also be published tonight. New Zealand’s GDP growth is expected to be stronger, but employment growth in Australia will slow. However, and which grew against the background of the weakness of the US dollar after the FOMC, will continue to trade based on market appetite for the US dollar.

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