United States: Fed hikes aggressively in June; more to come
At its meeting on 14–15 June, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 75 basis points to 1.50–1.75%—the first 75 basis-point hike since the 1990s. The Fed also stated that it would continue reducing the size of its balance sheet.
The Fed’s decision to raise rates so aggressively was driven by the desire to tame inflation, which resumed an upward trend in May following a brief reprieve in April. Higher international commodity prices and an extremely tight domestic labor market have fueled price pressures recently, with the strong economy providing room for the Fed to hike.
Looking forward, the Fed reiterated that “ongoing increases in the target range will be appropriate”. In the Fed’s own projections, the policy rate will rise to 3.1–3.6% by end-2022, in line with our panelists’ forecasts.
On the outlook, analysts at Goldman Sachs said:
“While there is more than one way to get there, we think the most likely path is our forecast of another 75bp hike in July, a 50bp hike in September, and 25bp hikes in both November and December.”
On the economic impact of rate hikes, analysts at ANZ said:
“The rapid move in the FFR [..] from the zero lower bound in March is the most aggressive start of any recent tightening cycles. It is also easily the most aggressive tightening relative to the prevailing neutral rate. Restrictive monetary policy is expected to result in GDP growth falling below potential and thus an increase in the unemployment rate.”
The next FOMC meeting is scheduled for 26–27July.