US Federal Reserve vows to fight inflation, signals another two 50bps rate hikes by December-end | The Financial Express

US Federal Reserve vows to fight inflation, signals another two 50bps rate hikes by December-end

US Fed Chairman Jerome Powell in its speech indicated another two hikes, probably 50 bps each before this year

US Federal Reserve vows to fight inflation, signals another two 50bps rate hikes by December-end
US Fed is willing to take the risk of economic fallout of these policy hikes to tame inflation. Image: Reuters

By Arun Malhotra

The battle with inflation is on, and in continuation of past policy, raised the interest rates by another 75 bps. US Fed Chairman Jerome Powell in its speech indicated another two hikes, probably 50 bps each before this year and one last hike in early 2023. The Fed is finding it difficult to contain inflation, hurting growth in the process. The wage market is still tight and is a cause for higher consumer demand. The goal of reaching an inflation target of 2% looks a little stretched in the current scenario, but the steep hikes are going to hurt families and businesses and finally the consumer demand and the economic growth. 

Also read: US Federal Reserve may hike interest rate by 75bps yet again in November; FOMC unlikely to cut rates in 2023

The Fed is willing to take the risk of economic fallout of these policy hikes to tame inflation. My personal belief is that this kind of aggressive rate hike will kill growth and markets, but it will be short-lived and in the later part of the year, the Fed will have to bring rates down as a stimulus to revive the economy. I do not see prolonged periods of economic slowdown. 

The early signs are visible in the mortgage market, where the mortgage rate has doubled in the past 12 months, and the real estate prices have started softening. The vacancies are on the rise, real estate sales have also slowed down, and the U.S housing market is headed for a correction. The other segment that gets hurt is the consumer credit as credit cards have hiked their rates, and all these businesses will sooner or later get impacted by slower revenues, leading to job losses and higher unemployment numbers. To add to all this woes, Europe is suffering one of its worst crises, fuelled by the energy crisis. The UK has already seen inflation numbers around 10.0%, unseen in the past 40 years. The squeeze in the EU is mainly caused by energy prices, while the commodity prices are hurting the entire world. This is just one of those periods where the excesses created by cheap money printing will get corrected. 

Also read: India’s GDP to grow at 7.5% in FY23 despite developed-economy recession; inflation to stay above 6% till Nov

The Russian Ukraine crisis is another factor that is having an impact on global trade, and the resulting supply disruptions have reduced but the return to normalcy is far away. The social implications across the EU are not well understood by the policy makers. All these economic headwinds across the U.S and EU do not augur well for the global equity markets.

The emerging markets like India may be the biggest beneficiary of all this turmoil. India is more of a structural domestic story where the growth is more localised, driven by domestic consumption. The local interest rates will have to rise in tandem with the global hikes, in order to protect currency, but the growth drivers seem to be firmly in place. The capex story is unfolding well and after a long spell of low capex, companies are looking forward to expanding their manufacturing capacities. All this buoyancy is also reflected in the quarterly commentary as well as robust GST and tax collections. India will continue to shine amidst the gloom.

(Arun Malhotra, Founding Partner and Portfolio Manager, CapGrow Capital Advisors. Views expressed are the author’s own.)

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