The Fed raises interest rates to 0.25% and promises to continue with the increases

There was no surprise. The Federal Reserve has announced an increase in interest rates interest a quarter of a point, around 0.25% to 0.5%, kicking off a series of increases for the next meetings. “Continued rate hikes will be appropriate” to stabilize inflation, the US central bank’s Open Markets Committee meeting statement said.

Specifically, the forecasts of the members of the Fed -the so-called ‘dot plot’- point to six rate hikes this year, to around 2%. Even so, there are big differences: the biggest ‘dove’ of the Fed expects to reach 1.5%, while there is a ‘hawk’ that points to 3% this year, according to the anonymous predictions of the different directors. For next year, three more increases are expected on average.

The biggest question was whether the first rate hike since 2018 would be just a quarter of a point, as it has finally happened, or whether they would decide to skip screens and bet on a half hit point raise, as suggested by St. Louis Fed President James Bullard, who stood alone in the vote defending this move. In the end, the tensions and doubts caused by the war in Ukraine seem to have pushed supporters to slow down. “Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to put additional upward pressure on the inflation and weigh on economic activity,” the statement said.

In his last appearance before the US Congress, Powell had announced that “with inflation well above 2% and a strong labor market, we see it appropriate to raise the target range for the federal funds rate in our meeting at the end of this month“The process of removing accommodative policy under the current circumstances will involve both increases in the target range of the fed funds rate and a reduction in the size of the Fed’s balance sheet,” he added. Still, in today’s statement , it remains unspecified when the reduction of said balance will begin “We have made progress, and we hope to announce the measures at a future meeting, perhaps in May,” is all he manages to say.

The market discounted it

Analysts took it for granted before the Fed’s statement that the highest institution would today kick off the cycle of interest rate hikes. From Bank of America they took for granted a 25-point rate in March and an “aggressive tone from President Powell” regarding inflation and the Fed’s response to stand up to it. This is exactly the forecast of UBS, which the institution “will raise rates 25 basis points, not 50″ as had been thought since the last intervention. From the Swiss bank they clarify that “if inflation is not reduced in the second half of the year” the possibility of a “sustained tightening of monetary policies” will be considered.

From Axa IM they affirm that, although they coincide with the forecasts and affirm that “there were enough signs before the pandemic that the US economy was growing too fast and that inflationary pressure had become self-sustaining. So it makes sense to raise rates in the current energy shock and we expect the first 25bp hike to be announced this week.” Ben Laidler, Global Markets Strategist at eToro, says his forecast is “after two hikes in 2023 with which this cycle would end at 2.0%. This would make it one of the most superficial and short in history. The Fed will then begin to reduce its massive $9 trillion balance sheet of Treasury and mortgage bonds.”

“Inflation will remain high”

In his press conference, Jerome Powell pointed out that inflation and the war in Ukraine are not going to stop the US economy. Fed expects strong GDP growth: 2.8% real -that is, discounting inflation- this year, 2.2% in 2023 and 2% in 2024. Even so, inflation this year will exceed 4% and will only drop to 2, 8% next year, according to the average of the members of the Fed.

In addition, the president rejected the possibility of a recession. “The probability of a recession in the next few years is not very high. All signs point to a very strong economy, which will not only be able to withstand but will flourish in a tougher rate environment,” Powell said. “The expected 2.8% rise in GDP is one of the highest in recent years,” he recalled.

Regarding the conflict in Ukraine, Powell acknowledges that the invasion has worsened supply chain problems and delayed the end of inflation. “We expected it to peak at the end of the first quarter, but the rise in raw materials” caused by the war, “and the fact that many supply chains are becoming entangled again, avoiding Russian companies, has delayed the fall in inflation, “he acknowledged. In the current forecast, they expect prices to begin to relax in the second semester, but from a higher level and slower than expected “Next year we do expect it to drop quickly”.