US Fed raises key interest rate by 0.25% P The news that the Federal Reserve has raised the key interest rate on the screen of the New York Stock Exchange on the 16th is reported. The Fed raised interest rates by 0.25 percentage points, which had remained at zero since the coronavirus pandemic in March 2020. NEW YORK: The US central bank, the Federal Reserve, announced on the 16th that it would raise the benchmark interest rate to quell inflation for the first time in three years and three months since December 2018. In particular, he foretold an aggressive monetary policy by accelerating the width and speed of future interest rate hikes and implementing “quantitative austerity” by selling assets purchased by the Fed to the market.
If the US raises interest rates, it is highly likely that the capital scattered around the world will return to the US, where high returns are expected. If each country raises interest rates at the same time to prevent this, there is an observation that the world economy, which has already been hit by Russias invasion of Ukraine and the novel coronavirus infection, could have a bigger shock.
○ “6 additional rate hikes this year”
“Without price stability, we cannot achieve sustained maximum employment,” Fed Chairman Jerome Powell said. “Our plan is to maintain a strong job market and restore price stability,” he said. In particular, he emphasized that it will do so once it has come to the conclusion that it is appropriate to raise interest rates faster.
The average level of interest rates at the end of this year, predicted by 16 members of the Federal Open Market Committee, which sets interest rates, is 1.875%. Seven members also believed that the year-end interest rate would exceed 2%. The interest rate, which rose to 0.25-0.50% due to todays hike, must be raised by 0.25 percentage points in all six FOMCs to reach the level. If the Fed actually raises six more, the year-end base rate would be 1.75-2%.
As a result, Wall Street expects the Fed to raise rates six more times this year. There is also a forecast that a certain FOMC will carry out a “big step,” meaning a 0.50 percentage point increase. According to the Wall Street Journal, the Feds move is similar to when it raised rates 17 times in a row between 2004 and 2006. At the time, when asset prices soared due to long-term low interest rates, the Fed launched a massive tightening.
“Quantitative austerity,” which reduces the Feds holdings, will also go hand in hand with interest rate hikes. Chairman Powell made it clear that he would start reducing the balance sheet at the next meeting, and that he would start quantitative austerity at the FOMC on May 3rd and 4th. The Fed has provided liquidity by buying bonds in the market to stimulate the economy amid the coronavirus outbreak. The accumulated assets amount to 8.9 trillion dollars. Selling it would have the effect of absorbing liquidity directly, which could have a significant tightening effect.
○ “Ukraine crisis raises prices”
The Fed said the surge in international oil prices following Russias invasion of Ukraine is adding to inflationary pressures, putting a strain on the US economy. The Fed raised its inflation forecast for this year to 4.3% from 2.6% three months ago. Thats more than double the Feds 2% inflation target. The growth forecast for this year has been lowered to 2.8% from the previous 4%.
Chairman Powell said the rise in crude oil and raw material prices due to the Ukraine war is putting a short-term upward burden on inflation.
However, regarding the prospect of a recession in the U.S. economy next year due to the prolonged war, he said, “The economic impact of the Ukraine situation on the U.S. and global economy is very uncertain. “The chances of a recession next year are not particularly high.”