Briefly –
- Fed hiked interest rates by 75 basis points.
- The goal is to push rates beyond neutral at around 100bp.
- More impending hikes.
2022 seems a historic year for monetary decisions by central banks. The European Central banks conducted an emergence conference yesterday, following last week’s daunting task.
Nevertheless, the market had no time to contemplate what the meeting was about as the United States Fed Reserve’s financial decision loomed largely. Meanwhile, the market was expecting a 50 basis point rate increase until Monday (according to Fed’s past implications).
However, things shifted dramatically, with Monday’s Wall Street Journal article hinting at Fed considering a 75 basis point rate hike. Surprisingly, the Fed introduced a 75bp surge, the highest interest rate hike in about 30 years. “Desperate measures for desperate times.”
That was Fed’s primary message during the press conference. Meanwhile, uncertainty caused by the Chana lockdowns and the Ukraine war makes it challenging for the U.S Fed to predict inflation. Therefore, it will resort to any possible measure to curb it, and the rates remain among the tools Fed will extensively use.
The current rate increase has Fed funds rate at 1.75%. Furthermore, Fed reveals plans for another 50 basis point or 75bp hike come next month, contingent on the incoming financial data. Thus, the funds’ rate could be beyond 2% by July. However, it that enough to curb inflation.
Furthermore, should anyone purchase the U.S dollar with Fed executing the highest rate increase in nearly three decades? Savvy investors say, “Never fight the United States Fed.” Fed’s rates remain high than other central banks, and increasing them makes it challenging to forecast a weaker U.S dollar in the coming months.
History Reveals More Hikes
Fed seems prepared for tighter monetary policy, and history supports such claims. Recently, the renowned investor Stanley Druckenmiller stated that the federal funds rate exceeded CPI whenever inflation climbed by over 5% (throughout history). Meanwhile, U.S CPI hit 8.6% Y/Y in May. Thus, the funds’ rate should rise further to cool inflation.
Fed’s Strong Commitment
Lastly, Fed’s message (yesterday) was crucial for anyone contemplating shorting the U.S dollar. It reveals plans to have a funds rate beyond the neutral level by around 100 basis points in the coming two years. A neutral rate is the inflation net that allows max employment.
Yesterday’s comment by Fed was hawkish, and considering it is reducing its balance sheet translates to a bullish scenario for the U.S dollar.
