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There’s some optimism that the Fed could slow down the speed of rate hikes in the coming months. However, the path to “soft landing” has narrowed said Fed chairman Jerome Powell.
On Wednesday, November 2, the US Federal Reserve announced a 75 basis points rate hike to control the rising inflation. The rate hike came on the expected line as the Fed shared how it will tackle monetary policy going ahead.
Another Rate Hike by Fed
With the recent rate hikes by the Fed, the interest rates have jumped to 3.75%-4%, the highest since January 2008. This is also the most aggressive speed of rate hikes since the 1980s. Four years back, the inflationary situation was the same as it is today.
In their address yesterday, the Federal Reserve also hinted that this could be the last 75 basis points rate hike by the Fed. The US central bank hinted at a policy change adding that while determining future hikes, the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Interestingly, economists also hinted at a step-down in the policy. They are expecting another 50 basis points interest rate hike in December followed by smaller hikes throughout 2023. A statement from the Federal Open Market Committee (FOMC) reads:
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
The US Market Movement
Soon after the FOMC statement, there was a sharp upswing on Wall Street for a short time, however, entered correction later. Soon after Fed Chairman Jerome Powell spoke in a news conference dismissing the idea that they could be pausing anytime soon. Powell also added that it would take resolve and patience to bring inflation down.
“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he added.
Powell also spoke about the idea that there would come a time to slow the pace of rate hikes. “So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made,” he said.
The Fed chairman also flagged concerns about the future. He said that it would take longer than expected to stop future rate hikes. this has also reduced the chances that the Fed will be able to achieve a soft landing. Responding to the question of whether the path for “soft landing” has narrowed or not, well said:
“Has it narrowed? Yes. Is it still possible? Yes.”
Powell also said that the need for higher rates would make the job even more difficult. “Policy needs to be more restrictive, and that narrows the path to a soft landing,” he added.
Some market analysts believe that the US could be entering a recession in the next six to nine months from now i.e. by mid-2023.