ANKARA
With this week’s interest rate hike and six more increases expected this year, the US Federal Reserve has entered an aggressive monetary tightening cycle to bring down inflation, according to two experts.
"Fed Chair Jerome Powell knows the Fed is behind the curve and will need to catch up, which is tricky to do without undermining the economy," Ryan Sweet, an economist at Moody's Analytics, told Anadolu Agency by email.
"All told, the Fed is embarking on a fairly aggressive tightening cycle, and it will be difficult to engineer a soft landing," he added.
The Fed raised interest rates by 25 basis points Wednesday to a range between 0.25% and 0.50%, its first rate hike since December 2018, and signaled that it expects to raise rates six more times this year, according to its “dot plot,” a chart that records each Fed official's projection for its key short-term interest rate.
"The dot plot signaled a more aggressive tightening cycle ... but we don’t put a lot of stock in the dot plot beyond the current year, because there is significant uncertainty in the outlook and the Fed’s view of the appropriate path for the federal funds rate can change noticeably," Sweet said.
Mark Zandi, chief economist at Moody's Analytics, emphasized that inflation expectations face a growing risk of becoming "untethered," and if that happens, this will make it even more difficult for inflation to recede back to the Fed’s inflation target of 2%.
"The Fed is now on high alert over the high inflation and made it clear today that it will act aggressively to rein in inflation, which under almost all scenarios won’t get back to the Fed’s target until late next year," he told Anadolu Agency via email.
Effects on markets
Zandi warned that the Fed normalizing its monetary policy quickly will continue to put pressure on stock prices.
"It wouldn’t be surprising if the stock market suffered another round of significant selling as investors adjust to the higher interest rates, and it is hard to see the market coming back until it appears the rate increases are coming to an end, which isn’t anytime soon," he said.
After an additional six rate hikes for this year of 25 basis points each, the Fed penciled in three more rate hikes for 2023, according to its projections.
"Financial market conditions have and will likely continue to tighten," Sweet said.
Giles Coghlan, chief currency analyst at London-based Forex and CFD provider firm HYCM, said traders and investors saw a “buy the rumor, sell the fact” response to the Fed, which favored an upside in stocks and gains for gold and silver.
The Dow Jones Industrial Average rose 1.55% at Wednesday's close, while the S&P 500 jumped 2.24%. The Nasdaq rallied 3.77%.
While gold and silver added 0.35% and 0.76%, respectively, the VIX volatility index, known as the fear index, plummeted 10.6% to 26.67.
"Right now, the central bank has a lot on its plate – it must balance the inflation narrative alongside the risk of sending the US economy into a recession," Coghlan told Anadolu Agency via email.
Sweet noted that most of his institution's probability of recession models suggest that the odds of a recession in the next 12 months have recently risen.
'Inflation unlikely to moderate quickly'
Russia's continuing war on Ukraine caused most commodity prices to skyrocket last week, while the price of Brent crude oil on March 7 jumped to $139.13 per barrel, its highest since 2008, amid the US import ban on Russian oil, natural gas, and coal.
"Prompting the Fed to action is the painfully high inflation, which is being exacerbated by Russia’s invasion of Ukraine and the resulting spike in oil and other commodity prices," Zandi said.
Coghlan pointed to annual consumer inflation coming in at a 40-year record high of 7.9% in February, adding that this has been "exacerbated by Russia’s invasion of Ukraine, which has triggered supply issues and a fresh surge in commodity prices.”
Sweet stressed that the US’ record high inflation is unlikely to moderate quickly due to the recent increase in global oil prices.
"An easing in US supply-chain stress is critical to the outlook for inflation to moderate, but new potential issues have emerged that may cause supply-chain issues to intensify," he said.
"China is dealing with a (new) wave of COVID-19, and the country has a zero-tolerance policy. This lends additional upside risk to near-term inflation," he added.
