Deniz Kılınç / Istanbul, June 16 (HNA) – US Federal Reserve’s 75 basis point rate hike, which is the highest rate increase of the last 28 years, caused a turmoil in the financial markets and Fed Chair Jerome Powell’s fight against the rising inflation may not result in a “soft landing”, according to experts.
Fed’s long-awaited interest rate decision came in yesterday after the Federal Open Market Committee (FOMC) meeting with a whopping 75 basis point rate, which resulted in the Fed authorities raising the benchmark policy rate to 1.5 percent-1.75 percent. The most recent Fed decision was the highest rate hike since 1994 and Powell’s speech following the meeting caused a downturn in the markets.
“Today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Powell said, however, added that he expects the July meeting to see an increase of 50 or 75 basis points.
“We want to see progress. Inflation can’t go down until it flattens out,” he stated. “If we don’t see progress, that could cause us to react. Soon enough, we will be seeing some progress.”
2022 growth outlook decreased to 1.7 percent
Meanwhile, Fed officials also significantly cut their outlook for 2022 economic growth, now anticipating just a 1.7 percent gain in GDP, down from 2.8 percent in March.
The inflation projection as gauged by personal consumption expenditures also rose to 5.2 percent this year from 4.3 percent, though core inflation, which excludes rapidly rising food and energy costs, came at 4.3 percent, up just 0.2 percentage points from the previous projection.
“Overall economic activity appears to have picked up after edging down in the first quarter,” the statement read. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Deterioration in greenback
Karl Schamotta, the chief market strategist at business payments company Corpay, pointed to Fed Chair’s remarks during the news conference following the rate decision as part of the reason the dollar sold off. “Ultimately, Powell failed to out-hawk market expectations,” Schamotta said. “Traders are piling into currencies issued by central banks that are likely to follow today’s Fed’s hike with aggressive moves of their own.”
Indeed, the dollar was 0.50 percent lower at 104.76 against a basket of currencies, after rising as high as 105.79, its strongest since December 2002, in the aftermath of the Fed decision.
Meanwhile, the greenback had already weakened against the Euro earlier in the session on news of a surprise meeting by the European Central Bank (ECB), which some traders hoped would address fragmentation risk in the region. The so-called fragmentation risk refers to the worry that the ECB’s monetary policy actions may affect the 19 nations that make up the Eurozone in differing ways.
The ECB will devise a new instrument to stop fragmentation and help more indebted, it said on Wednesday.
With the renewed selling pressure on the dollar, the Euro was up 0.36 percent to 1.0452 dollars.
Higher U.S. rates versus rock-bottom Japanese yields have been weighing on the yen, which hit a new 24-year low of 135.60 per dollar early in the session before erasing losses to trade up about 1.3 percent against the greenback.
Sterling recovered from its lowest level against the dollar since March 2020 on Wednesday, rising 1.71 percent to 1.2202 dollars.
In cryptocurrencies, Bitcoin slipped to a new 18-month low of 20 thousand 76 dollars, before paring losses to trade down about flat at 22 thousand 149 dollars, dragging smaller tokens down with it and deepening a market meltdown sparked by crypto lender Celsius this week freezing customer withdrawals.
What do the experts say?
Talking to the Financial Times, some experts weighed in on Fed’s rate hike.
Stephen Kane, a co-chief investment officer of fixed income at TCW: “The odds of a soft landing are pretty darn close to zero, and the reason is we’re in an unprecedented environment and the Fed’s overwhelming priority is inflation, inflation, inflation. Inflation is a lagging indicator [and] the fact they are looking to a lagging indicator for direction as to what to do for current monetary policy that works with a 12-18 month lag, that is almost a guarantee they’ll over-tighten and cause a recession.”
Michelle Meyer, chief US economist at Mastercard: “They need to start to see results in terms of moderation in inflation, and if it goes the other direction and inflation continue to accelerate, then the Fed is in a more tricky position. They’ll have to hike even faster and that could create more damage to the real economy.”
Tom Porcelli, chief US economist at RBC Capital Markets: “Where do you think headline prices are going within the next couple of months? They are only going higher. If this meeting came with a 75-basis point increase and you had an 8.6 percent inflation rate, and now it’s going to accelerate beyond where we were to 9 percent — what do you think is going to happen in July? This dynamic could take root through to the end of the summer, meaning yet more pressure for the Fed to act aggressively through to September at the earliest.”
Julia Coronado, a former Fed economist now at MacroPolicy Perspectives: “There’s a risk they are going to hike even more than they are saying in the [dot plot], given what Powell laid out and how trigger happy they are. The risks of recession have definitely risen because they are not tolerating anything and they’re going to react to everything in a hawkish direction.”