More rate hikes quickly coming from Fed: Economist

ANKARA

More interest rate increases are quickly coming from the Federal Reserve in the next months, according to Mark Zandi, chief economist at Moody's Analytics.

"Bond investors expect another half point hike at the Fed’s June and September meetings, and several quarter point rate hikes are expected after that. This would put the funds rate at 3.5% by this time next year," Zandi told Anadolu Agency via email.

The Fed raised its benchmark interest rate by 75 basis points on Wednesday, marking its biggest hike in 28 years, carrying the target range for the federal funds rate up to 1.5%-1.75% range.

The central bank also said in its projections that it anticipates the benchmark interest rate to end this year at 3.4%, an upward revision of 1.5 percentage points from the March estimate of 1.9%, according to the "dot plot" of the Federal Open Market Committee (FOMC) members’ expectations.

"The Fed is scrambling to get interest rates back up to something more consistent with an economy that is near full-employment and grappling with painfully high inflation," said Zandi.

Annual consumer inflation in the US climbed to 8.6% in May, the highest level in more than 40 years. The Fed is moving aggressively in its monetary tightening to move the inflation down rapidly to its 2% target.

"The Fed’s highly aggressive rate hikes has had the benefit of bringing down the inflation expectations of global bond investors, who think the Fed will succeed in getting inflation back down to its target over the next couple of years, one way or another," said Zandi.

The economist said as inflation expectations are anchored, it means that it is more likely the Fed will succeed in getting inflation down without pushing the economy into a recession.

"Indeed, as indicated by the shape of the Treasury yield curve – the difference between 10-year and 2-year Treasury yields – investors believe the economy will slow sharply in coming months but will not suffer a recession. Of course, there is a lot of economic script to be written," he said.

On Monday, 2-year and 10-year Treasury yield curves briefly inverted for the first time since April -- a sign to investors of a recession.

Fed Chair Jerome Powell and some officials, in recent months, have repeatedly said they are hoping for a soft landing – where the central bank raises rates leading to an economic slowdown but avoiding a recession.

On Wednesday, Powell said the pace of the rate hikes will depend on the incoming macroeconomic data and the ongoing outlook of the economy, but emphasized that the FOMC will make its interest rate decisions meeting by meeting.

Although the Fed chair admitted that the latest 75 basis points rate hike is "an unusually large one," he did not rule out another 75 basis points increase at the Fed's July meeting.

"It is disquieting that it appears the Fed is ad-libbing monetary policy, as it only in the past few days leaked its intention to raise rates by three quarters of a percentage point," said Zandi.

"This suggests policymakers don’t have a clear strategy for quelling inflation and keeping out the economy out of recession," he said, stressing that risks of an ensuing recession are "uncomfortably high and rising."