By Tanvi Kanchan
The Federal Open Market Committee (FOMC) is expected to convene back on the 20th & 21st of September’22 for their next round of discussion on how to tackle the issue of inflation, after the Fed chair Jerome Powell reiterated his vow to crush inflation. The FOMC raised federal fund rates by 25bps in March’22, followed by a 50bps in May’22 and a 75bps hike in the June’22 and July’22 meeting. According to market consensus, there is nearly a 9 in 10 chance that the committee will deliver another 50 – 75bps hike for later this month. This meeting is also expected to have the economic forecast and the summary of economic projections by the Fed.
Inflation continues to remain a persistent issue, with the CPI for August’22 at 8.3%, still near historical highs and far from the Fed’s 2% inflation target. Inflation has been a critical economic concern throughout the year, and the Fed has responded by unprecedented tightening from the accommodative monetary policies set at the beginning of the COVID-19 pandemic.
Breaking down the data, energy prices have risen 23.8% year-over-year (including 68.8% for fuel oil) compared with 11.4% for food and 6.3% for other items. However, energy prices have actually fallen in the last two months: they’re down 9.6% overall and down 16.9% for fuel oil specifically. Falling gas prices are a good sign, but they’re still much higher than they were a year ago. Even if they continue to fall, inflation could remain stubbornly high.
Looking at the labor market, the data point seems to be improving, with the unemployment rate at 3.7% and employers consistently adding jobs month-on-month. There are upwards of 11 million jobs open, 4 million more than pre-pandemic. This is also one of the reasons why the Fed seems comfortable with raising rates.
The rate at which tightening cycle is being followed and its impact on a global scale, as well as the uncertainties, with effects of tighter financial conditions and aggregate demand, creating further risk associated with rate hikes. High inflation and interest rates affect the entire economy. It’s tough to invest during inflation, but higher rates mean more interest in high-yield savings accounts and other deposits. As mentioned earlier, expectations of a rate hike are highly anticipated.
(Tanvi Kanchan, Head – Corporate Strategy, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)