The Looming Fed decision

The Looming Fed decision

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All eyes are on the US this week, and no, it's not some celeb-filled, ad-laden spectacle. Everyone is waiting to hear from the Federal Reserve, as it kicked off a two-day meeting to set the next interest rate. Inflation has been growing at its fastest pace since 1981, and the Federal Reserve's Wednesday meeting will discuss whether or not to make the biggest interest rate increase since 1994. 

Analysts and spectators are abuzz with what's to come, with everyone speculating the domestic and international impacts. Some analysts are convinced and are speculating that the central bank policymakers are entertaining the idea of a 75 basis point increase to the Fed's benchmark funds rate that banks charge each other for overnight financing – the largest in nearly 30 years. 

Goldman Sachs said it is altering its own expectation of a 50 basis point move to 75. Its economists now foresee consecutive 75 basis point rate hikes in June and July, followed by a 50 basis point move in September and 25 basis point moves in November and December, taking the fed funds rate to a range of 3.25%-3.5% by the end of the year. 

The consensus remains for policymakers to stick to the plan, and central bankers are typically loath to surprise markets, although they insist their decisions are "data dependent" and will adjust to evolving situations. Fed chair Jerome Powell famously stated in May that he expected inflation to start flattening out unsurprisingly, it hasn't. In fact, in the US, it accelerated to 8.6%.

Why it matters

The Fed has raised rates twice, including a big, half-point increase last month. Low lending rates and the boost from massive federal stimulus caused demand to outstrip supply amid global supply chain snarls, pushing prices higher, and the Russian invasion of Ukraine added more fuel to the inflation fires, sending food and fuel prices soaring.


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