US Fed will likely hike policy rate above 5% to squeeze too-high inflation
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The United States Federal Reserve will likely have to lift the benchmark rate above 5%, and even ensure that it stays there in order to squeeze too-high inflation out of an economy with the strong labor market, even after almost a full year of the most aggressive rage hikes in the last four decades.
At least, this is what the investors expect, as this was the betting in financial markets this friday, following the announcement by the US Labor Department, which said that employers added over half a million jobs in the last month alone. This was far beyond what was expected, and the unemployment rate dropped to 3.4%, which is the lowest in over half a century.
This was also how the president of the San Francisco Fed, Mary Daly, saw it. In December 2022, policymakers thought that it would likely be necessary to increase the rates to 5.1%, at least, in order to tame inflation in 2023. In fact, at this time, this projection is still taken as a good indicator when it comes to where the policy is going, according to Daly.
She said that she is prepared to go even beyond that, if it is necessary. When it comes to the Fed policymakers such as Daly and Fed Chair, Jerome Powell, the view is not very optimistic at this moment. However, this does not come as a surprise, given that Daly called the “wow” strength of the job gains in January of this year.
However, this is a serious turnaround when it comes to the markets. Earlier this week, the Fed boosted the benchmark rate by ¼ of a percentage point, taking it from 4.5% to 4.75%. After making the decision, Powell held a news conference in which he said that he expects an ongoing increase to get monetary policy restrictive enough, given how tight the labor market has been. This is the only way to create a properly balanced job market, and take control of the raging inflation.
What is expected for the rest of the year?
As for the interest-rate futures traders, they were skeptical at first, with a disinflationary trend already underway, as they expected that the Fed would require over one further quarter-point interest rate increase come March. However, after the new job report was published this Friday, they now do not expect an additional increase until May.
If it comes to pass, the move would increase the policy rate from 5% to 5.25%. Furthermore, traders pushed out their expectations for the Fed rate cuts following the job report, expecting them in November, as opposed to the initial prediction, which said that they will come in September.
Powell also noted that he doesn’t expect inflation to drop fast enough in order to allow rate cuts at all in 2023.