- The Federal Reserve delivered the biggest interest-rate increase of 50 bps since 2000 and signaled it would keep hiking at that pace over the next couple of meetings
- The Fed has announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of treasury and mortgage bonds.
- Core inflation is at elevated levels and inflationary pressures have been broadening out.
- Headline Personal Consumption Expenditure (PCE) inflation for February came in at 6.4% on a 12-month basis.
- Durable goods inflation, particularly in autos, accounted for slightly more than one-fifth of total PCE inflation in February.
- Geopolitical events pose downside risks to growth.
- The U.S. economy entered a period of uncertainty with considerable momentum in demand and a strong labor market.
- Powell’s remarks have given a further lift to the US markets, as he dashed speculation that the Fed was weighing an even larger increase of 75 bps in the months ahead.
Outlook & Conclusion
Inflation has been accelerated by a combination of robust consumer spending, chronic supply bottlenecks and sharply higher gas and food prices, exacerbated by Russia’s war against Ukraine. Core inflation is likely to remain elevated in the coming months. The Fed said it would allow up to $48 bn in bonds to mature without replacing them Starting June 1, that would reach $95 bn by September. Its balance sheet would shrink by about $1 trillion a year at September’s pace. Jerome Powell has said he wants to quickly raise the Fed’s rate to a level that neither stimulates nor restrains economic growth. Higher rates indicate higher loan rates for many consumers and businesses over time, including for mortgages, credit cards and auto loans. The central bank hopes that higher borrowing costs will slow spending enough to tame inflation and not so much as to cause a recession. The rate hike was very much anticipated in case of US and Brazil unlike India which surprisingly hiked rates by 40bps on 4 May 2022, well before the monetary policy in Jun 2022.