The Fed considers the biggest rate hike since 1994

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The market is pending the US central bank, which plans to attack inflation with a rise of 75 basis points

Jerome Powell, Chairman of the Federal Reserve Board.
Jerome Powell, Chairman of the Federal Reserve Board.Patrick SemanskiAP
  • economy The Fed tightens its expectations and foresees seven rate hikes until 2024

The United States Federal Reserve could decide this Wednesday the biggest rise in interest rates in 27 years in an attempt to control price increases that are proving to be much stronger and more durable than expected by central banks around the world and, also, by financial institutions. multilateral. The CPI reached 8.6% in May, a figure that, no matter how hard you try, cannot be considered acceptable. What’s more, core inflation, which excludes food and energy, which are supposed to be the most volatile items in the index, was 6% that month. For the economist and consultant ed yardeni, these figures indicate that “inflation is not a transitory phenomenon, but extended”. Precisely, the word “temporary” had been a constant until just a week ago in the documents and statements on the evolution of prices by the Federal Reserve and the International Monetary Fund.

This is how some market participants – like J.P. Morgan and Wells Fargo, the first and fourth largest US bank by assets – believe that the ‘Fed”s repeated forecasts of raising rates in half-point increments throughout 2022 have been nullified by reality when the upward cycle has barely begun. Result: today the price of money in the US could rise by 75 basis points, that is, a quarter of a percentage point. Since November 15, 1994, that economy has not experienced a rise of that magnitude.

Currently, official US rates are in a range between 0.75% and 1%, so if the increase is three quarters of a point, they would go to 1.5%-1, 75%. To date, the Fed has carried out two rate hikes: a quarter-point hike in March and a half-point hike in May. Other financial institutions, such as the fund manager julius baerbelieve, however, that the upward cycle will continue at the rate set by the monetary authority, of half-point hikes.

Expectations about the future evolution of monetary policy are already having repercussions on the so-called “real economy”. Mortgage loans at 30 years – which are the most common in the United States – reached 5.23% last week, their highest level since 2009, and it is likely that before the end of the month they will break the psychological barrier of 6%. In fact, the web RocketMortgagewhich is the largest provider of mortgages to individuals in the United States, had a reference interest rate of 6.25% on its website yesterday.

The point, however, is that with the CPI for May at 8.6%, rates are negative, that is, they are below what prices rise. Not even in the stagflation years – the combination of recession and hyperinflation – of the 1970s and 1980s were US interest rates so negative. So, regardless of the amount of today’s rise, what seems clear is that 2022 will be the year with the highest rise in the price of money since at least 1994. What will not happen is a rise to levels above the 4%, largely because the economy today is much more sensitive to changes in interest rates than it was almost three decades ago.

Meanwhile, inflation is showing no signs of moderating. Producer prices grew by 10.8% in May. The underlying index of Consumer Expenditure Prices (PCE, for its acronym in English), which is the indicator used by the Federal Reserve to follow the progress of inflation, stood at 4.9% in April, when the central bank’s objective is for it to be around 2% in the medium term.

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