Federal Reserve hopes to intensify inflation battle with super-sized rate hike

federal Reserve Hope to intensify your fight to overcome Red-Hot inflation on Wednesday with a double-sized rate hike for the first time in two decades, a move that threatens to slow US economic growth and increase financial pressure on Americans.

With inflation hitting a new 40-year high in March, the Fed is under pressure to move more aggressively to quell demand and slow consumer prices.

Fed Expects Engineered Soft Landing, But History Shows It Won’t Be Easy

Central bank policymakers raised rates by a quarter-percentage rate in March, but are almost certain to approve a sharp, half-percentage point hike at the conclusion of their two-day meeting on Wednesday. This would mark the fastest rate increase since 2000. Many traders believe the Fed will raise rates by a further half a point in June, and possibly in July as well.

“If the Fed fails to deliver more aggressive policy through a 50-basis point rate hike on Wednesday, the Fed will shock markets,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence and a former advisor to the previous Dallas Fed chairman. She noted that the focus will almost immediately shift to “how many half-point increases the Fed expects to start over the balance of 2022”.

On top of that, the Fed will likely begin shrinking its nearly $9 trillion balance sheet, a move that will further strengthen credit for American households. Minutes from the Fed’s March meeting suggest the central bank will begin opening at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities. By comparison, the Fed reduced its balance sheet by $50 billion a month from 2017 to 2019.

Many economists believe the Fed is taking too long to control inflation, with the Fed’s benchmark rate sitting in a range of just 0.25% to 0.5%. Adjusted for inflation, the prime interbank lending rate is actually negative.

Federal Reserve Chairman Jerome Powell poses during a news conference in Washington on January 29, 2020. (AP Photo/Manuel Balce Ceneta, File / AP Newsroom)

As a result, Fed policy makers, including the chairman Jerome PowellThe U.S. has telegraphed the markets in recent weeks that they will act “briskly”, confirming that several half-point rate hikes are likely in the coming months as they seek to neutralize rates at a level that Neither promotes nor harms the economy.

“It’s worth going a little bit more quickly,” Powell said during a recent panel discussion at the spring meetings of the International Monetary Fund and the World Bank. “I also think there’s something to the idea of ​​front-end-loading whatever housing deems appropriate. So that the 50-basis points on the table point in the direction.”

The question now is whether the Fed can successfully engineer the elusive soft landing — the sweet spot between easing demand to quell inflation without sending the economy into recession. There are growing fears on Wall Street that central bank policymakers will fail to do so: Goldman Sachs, Bank of America and Deutsche Bank are among the firms forecasting a recession within the next two years.

federal Reserve

The US Federal Reserve in Washington on April 20, 2022. (Liu Jie / Xinhua via Getty Images / Getty Images)

And last week, the Bureau of Labor Statistics reported that the economy unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the US economy was still in the grip of a COVID-induced recession.

“The window for a soft landing for the Fed is likely to be closed, as the economy is beginning to sag even before the Fed takes strong inflation-fighting action,” said DeMartino Booth. “The last economic pillar standing is the job market, but we are already seeing a weakening in new job postings.”

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Powell has pushed back against concerns that further tightening by the central bank would trigger a recession and maintained optimism that the Fed can strike a delicate balance between controlling inflation without crushing the economy. Nevertheless, he acknowledged the difficulty of the task ahead and said it is “absolutely necessary” for central bankers to restore price stability.

“Our goal is to use our tools to get demand and supply back in sync, so inflation bounces back without a recession,” Powell said. “I don’t think you’ll hear anyone at the Fed saying it’s straight and easy. It’s going to be challenging.”

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