Jerome Powell, head of the Federal Reserve, announced yesterday that the U.S. central bank will do everything it can to combat the highest inflation in 40 years.
Federal Reserve members are prepared to raise interest rates by more than 25 basis points at one time at one or even several meetings if the situation warrants, Chairman Powell said at the National Association for Business Economics conference in Washington. The Fed chief reiterated that the reduction of the Fed's massive balance sheet could also begin soon.
Interest rate hikes by up to 50 basis points
Recall that at its March meeting, the Fed raised the target federal funds rate by a quarter point for the first time in three years, to 0.25-0.5 percent. The Fed now expects to raise rates at each of its six remaining meetings this year, and the fed funds rate should reach 1.9 percent by the end of the year, according to Fed projections.
Powell added that the Federal Reserve will also raise interest rates if it comes with a squeeze on economic growth and employment when necessary to slow rampant inflation. To achieve the goal and combat price dynamics, the Fed may deliberately put the economy into a slowdown, stagflation or recession.
According to Goldman Sachs, the Fed will raise interest rates by 50 basis points each in May and June, and then raise rates four more times by 25 points each by the end of 2022. This would mean a total increase of 2 percentage points, to 2.25-2.5 percent. This, in turn, would mean that with inflation approaching 9 percent, the US will still have very deep negative real interest rates.
Markets are not panicking after the Federal Reserve unveiled its cards
The bond market seemed to react to the Fed chief's words, where yields may have risen and the curve flattened. The reactions of other markets seemed quieter. Contracts on stock indices, after several days of strong increases, do not react with panic falls, but only with small corrections. On the seemingly riskiest cryptocurrency market, bitcoin and ethereum even established local peaks. The price of BTC rose to USD 43,000 and that of ETH to USD 3,000.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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