US Federal Reserve to back up monster rate hike with another 75 basis point move
The US Federal Reserve will back up its monster rate rise last month with another big 75 basis point hike this week as it chases down scorching inflation across the pond.
That’s according to Wall Street analysts, who think Fed chair Jerome Powell and the rest of the federal open market committee (FOMC) will need to bear down on spending to squash price rises.
Inflation in the US is primarily being driven by demand for workers outstripping supply, putting upward pressure on wages. A strong jobs market is also supporting spending, handing firms more power to raise prices and still sell products.
Soaring petrol prices are also propelling living costs. Prices are up 9.1 per cent, the quickest acceleration in four decades.
The FOMC fears tightening policy too slowly will keep expectations of future inflation high, possibly baking strong price pressures into the US economy.
“The FOMC wants to keep inflation expectations contained and needs to moderate aggregate demand and better align labor demand with labor supply, rather than risk unhinging inflation expectations to the upside or more material labor market overheating,” analysts at UBS said.
They think the Fed will deliver the same 75 basis point hike it did last month on Wednesday.
As does Ellie Henderson, an economist at Investec.
However, she does “see the risk of [a one percentage point] increase, especially considering the general trend set by other central banks this week such as the [European Central Bank],” she added.
The ECB shocked markets last week by marking its first rate rise in over a year with a 50 basis point move.
The Fed has already lifted its main rate 150 basis points since March. That policy shift is starting to cool the American economy.
US home sales fell for the fifth straight month in June, down 5.4 per cent, caused by prospective homeowners retreating in the face of more expensive mortgages and record-high prices.
Weaker demand in the housing market may push down property prices, knocking consumer confidence, weighing on spending. This situation would choke US economic growth.
Some analysts fear America has already slid into a technical recession, defined as two consecutive quarters of contraction. The economy shrank 1.6 per cent in the first three months of the year.
Analysts have highlighted the Fed, and the Bank of England and ECB, are walking a tightrope between taming inflation without engineering a recession.
“Taking a step back, it seems as if central banks across the world are outbidding each other, competing for the most aggressive tightening cycle. The question is, with recession fears intensifying, where does this stop?,” Henderson said.