The Biggest Rate Hike since 1994

The Federal Reserve hiked its target interest rate by three-quarters of a percentage point to prevent a disruptive surge in inflation while forecasting a weakening economy and growing unemployment in the coming months. The action boosted the short-term federal funds rate to a range of 1.50% to 1.75%. Fed policymakers saw the rate climbing to 3.4% by the end of this year and 3.8% in 2023, a significant departure from March projections of the rate rising to 1.9% this year. This tighter monetary policy was accompanied by a downgrade to the economy's forecast, with the economy now expected to slow to a below-trend 1.7% pace of growth this year, unemployment rising to 3.7% by the end of the year, and continuing to rise to 4.1% through 2024.

Since March, when Fed officials predicted that they could raise rates and keep inflation under control while keeping the unemployment rate at 3.5%, inflation has persistently lingered at a 40-year high, with no sign of reaching the peak Fed policymakers planned for this spring.

The estimates contradict recent Fed efforts to portray tighter monetary policy and price management as compatible with stable and low unemployment. The 4.1% unemployment rate projected for 2024 is currently somewhat higher than the level considered by Fed officials to be consistent with full employment. Despite the more aggressive interest rate measures undertaken, authorities expect inflation to remain at 5.2% this year and slow to 2.2% in 2024, as assessed by the personal consumption expenditures price index.

Inflation has become the Fed's most pressing economic issue, and it has begun to have an impact on the political landscape, with public morale decreasing as food and gasoline costs rise. Inflation remained high, reflecting supply and demand mismatches caused by the pandemic, rising energy prices, and broader pricing pressures. "The committee is anxious about meeting its aim of 2% inflation."

This surge in inflation is driving central banks to consider a sharp increase in interest rates. If the Fed's aggressive policy causes a recession in the US, it can soon spread to other countries around the world, slowing down the global growth rates. Foreign portfolio investment will experience outflows if the Fed raises policy rates and the RBI does not FII Exodus. As a result, the impact of the US Fed rate hike on the markets will also be determined by the RBI's future actions. The market is currently not reflecting the impact of the rate hike because it has already been factored in during the last few days.

Thank you.

Regards,

Kashish Hazari,

Kautilya,

IBS Mumbai.