Fears of a Fed mistake grow as this week’s anticipated interest rate hike looms
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Jerome Powell (Chief of the U.S. Federal Reserve) attends the National Association of Business Economicseconomic conference in Washington D.C. United States, March 21-22, 2022.
Yasin Ozturk | Anadolu Agency | Getty Images
The Federal Reserve has the responsibility of slowing down the U.S. Economy enough to contain inflation, but not sufficiently so as to tip into recession.
On Wednesday, the Fed will announce a half percentile point increase to its benchmark interest rate. This is what the financial markets are expecting. Not only does the fed funds rate control how banks borrow short-term, but it also acts as an indicator for consumer debt.
There are growing doubts that it will pull it off. Even some ex-Federal officials have expressed concern. Wall Street witnessed another fierce sell-off Monday afternoon, with the Dow Jones Industrial Average and S&P 500 down more than 1% after being positive earlier in the session.
Roger Ferguson, ex-Fed vice chairman and CEO said “A recession at the moment is almost inevitable.”Squawk BoxInterview on Monday. It is a witch’s recipe, and there is a high chance of recession because the tool they have is crude. They can only control aggregate demand.
In fact, the most significant factor in inflation is the supply side, since the demand for goods outpaced supply dramatically during the Covid-era economic boom.
Fed officials have this year had to admit that the problem is more serious and persistent than previously believed. They spent much of 2021 insisting the problem was temporary and would soon disappear as normal conditions return.
Ferguson indicated that he believes the recession will hit 2023. He also said that it would be mild.
Hiking, and the’recession that comes along with it’
The Federal Open Market Committee, which meets this week in Washington DC, is pivotal. This means that policymakers almost certainly approve a 50-basis point interest rate increase. They also have the potential to make an announcement a reduction in bond holdingsThese were accumulated in the course of recovery.
Chairman Jerome PowellAll that will be explained to the public by Fed officials, who are trying to draw a distinction between an Fed that is determined to curb inflation and one that does not kill an economy that has been looking vulnerable to shocks.
“It means that you will have to increase enough to retain credibility and begin to shrink the balance sheets, and then he’s going have to deal with the recession that follows it,” explained Danielle DiMartino Booth CEO of Quill Intelligence, who was a key advisor to Richard Fisher, former Dallas Fed president. That’s going be a very difficult message.
Wall Street is rumored to be waging a recession, but most economists believe the Fed can control inflation and prevent a crash landing. According to market pricing, this week’s 50-basis point increase will be followed in June by 75 basis points. After that the Fed will settle back to a slower pace and eventually raise the funds rate up to 3% at the end of 2013.
However, none of this is guaranteed and will be heavily influenced by an economy. contracted at 1.4% annualized paceIn the first quarter 2022. Goldman Sachs predicted that the reading would drop to 1.5% and then expect a second quarter growth rate of 3%.
Worries about bad timing
Tom Porcelli of RBC Capital Markets, the chief U.S. economist said that the Fed faces “growing risks” and could be thwarted by the economic system.
Porcelli wrote in a note, “For starters. While everyone seems to be very focused upon here and now data/earnings which seem to suggest that all is fine at this moment, cracks are starting to appear.” “Moreover, this is all happening as inflationary pressures are quite likely to slow – and possibly slow more than seems appreciated at the moment.”
On Monday, there were new signs of growth that could at minimum slow down: ISM Manufacturing IndexThe April employment index fell to 55.4. This indicates that the sector is still growing but at a slower pace. Perhaps more importantly, the employment index for the month was just 50.9 — a reading of 50 indicates expansion, so April pointed to a near-halt in hiring.
How about inflation?
The highest 12-month readings in 40 years are still being registered. However, the Fed prefers to measure saw. a monthly gain of just 0.3%In March. March. Dallas Fed’s trimmed meanThe readings of either side of the range are called ‘The Graph.’ It fell from 6.3% to 3.1% in February to 3.1% by March.
These numbers invoke the most fearful fears of Wall Street: that the Fed, which is now behind inflation since its inception, may not be as flexible when tightening.
“They will reiterate: “Look, they are going to be sensitive to data. James Paulsen (chief investment strategist, The Leuthold Group), stated that if the data is changed, they’ll modify what they’re expected do. There is definitely slower real growth. Although it’s not on a falling cliff, the pace of growth is moderate. They’ll likely be more aware of that in the future.
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