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Montevideo, December 7th 2022 - 13:13 UTC

 

 

US Fed raises rates to curb growing CPI

Thursday, June 16th 2022 - 09:11 UTC
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The strong rate hike seeks “to avoid second-round effects, which would mean raising the rate even more”  The strong rate hike seeks “to avoid second-round effects, which would mean raising the rate even more”

The United States Federal Reserve Wednesday announced a 0.75% rate hike to between 1.5% and 1.75%, in a move to curb rising consumer prices. It is the first time since 1994 that the Fed has raised the rate this much.

The consumer price index (CPI) hit 8.6% yoy last week, which triggered volatility in the stock market. This is the third consecutive hike by the Fed, which also raised its inflation forecast for 2022 to 5.2% and cut its growth forecast to 1.7%, at the end of a two-day meeting of its monetary policy committee.

“Overall economic activity appears to have picked up after edging down in the first quarter,” the statement said. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Committee said in a statement.

“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Powell said. He added, though, that he expects the July meeting to see an increase of 50 or 75 basis points. He said decisions will be made “meeting by meeting” and the Fed will “continue to communicate our intentions as clearly as we can,” Fed Chairman Jerome Powell explained in his post-meeting news conference.

The yield on two-year U.S. Treasury bonds, highly sensitive to rate hikes, rose to 3.441% following the Fed's statement, just below the 3.456% level reached on Tuesday, which was the highest since November 2007.

“We want to see progress. Inflation can’t go down until it flattens out,” Powell said. “If we don’t see progress ... that could cause us to react. Soon enough, we will be seeing some progress.”

Meanwhile, the return on benchmark 10-year paper rose to 3.445% and remained below Tuesday's high of 3.498%, which was the highest since April 2011, which proved the 50 basis point hikes implemented thus far were not enough.

“The decision to raise the rate to 75 points is the first since 1994. Previously it had said it was going to be 50 points. Why now and to this magnitude? Because inflation expectations show divergence. The May data changed the dynamics,” Balanz analyst Nicolás Khon explained Buenos Aires' Ámbito.

Khon also pointed out that the strong rate hike seeks “to avoid second-round effects, which would mean raising the rate even more.”

Categories: Economy, United States.

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