Interest rates

Fed eyes bigger interest rate hike to tackle inflation caused by Russian-Ukrainian war

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The Federal Reserve released the minutes of its March 15-16 Federal Open Market Committee (FOMC) meeting, which revealed that the Russian invasion of Ukraine was seen as adding to the uncertainty surrounding the outlook for the economy. economic activity and inflation, “as the conflict carried the risk of further aggravating supply chain disruptions and putting additional upward pressure on inflation by driving up oil prices energy, food and other key commodities.

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In light of greater short-term uncertainty associated with Russia’s invasion of Ukraine, participants judged that a 25 basis point — or 0.25% — increase in interest rates would be appropriate at this meeting.

“The Russian invasion of Ukraine, however, hurt global risk sentiment and exacerbated supply bottlenecks,” according to the minutes. “Overseas inflation continued to rise, driven by the recovery in global demand, rising retail energy and food prices and continued strains in global supply chains; the effects of the Russian invasion contributed to some of these inflationary pressures.

At the latest meeting, as US inflation hit a 40-year high, in a much-anticipated move, the Federal Reserve raised rates for the first time since 2018, by a quarter of a percentage point.

The minutes also show that many participants noted that with inflation well above the Committee’s target, inflationary risks on the upside, and the federal funds rate well below participants’ estimates of its longer-term level term, they would have preferred an increase of 0.5%.

“Many participants noted that one or more 50 basis point increases in the target range may be appropriate in future meetings, particularly if inflationary pressures remain elevated or intensified,” according to the minutes.

Louis Ricci, Head Trader at Emles Advisors, told GOBankingRates that there were “no surprises in the minutes”.

“Keep expecting an aggressive tightening cycle as many expected them to confirm they were looking to hike 50bps in March but didn’t due to the invasion of Ukraine by Russia. They are not selling the MBS agency, but have planted the seed that it could happen in the future, Ricci said. “It would be a particularly hawkish action in relation to an increase in the rate of federal funds or an increase in balance sheet runoff.”

Also unsurprisingly, the Fed also said it would reduce its balance sheet by $95 billion a month – with monthly caps of around $60 billion for Treasuries and around $35 billion for MBS. agency, depending on the minutes. Depending on economic and financial conditions, initiating the process of reducing the size of the balance sheet would be appropriate at a future meeting, possibly as early as the May meeting of the Committee.

Sarah Evans, CEO of Sevans PR, told GOBankingRates that the minutes reveal the Fed reached a consensus centered on the surge in the inflation rate that exceeded the federal two percent target by threefold.

“At the highest since 1982, the minutes indicated several sell-off scenarios to deal with it and include monetary policy tightening as well as a reduction strategy aimed at shrinking the balance sheet by $95 billion per month starting in May. “, she said. “A series of interest rate hikes is ahead of us and should increase steadily over the next three years.”

After the minutes were released, the Dow Jones Industrial Average fell more than 300 points, while the S&P 500 fell 1.2% and the Nasdaq Composite fell 2.35%, according to CBS.

Edward Moya, senior market analyst, Americas, OANDA, said in a note sent to GOBankingRates that stocks extended losses after Fed minutes showed they were ready to deliver “large upsides and to reduce its massive bond holdings at a maximum rate of $95 billion per month.

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“Everyone knew the Fed was telegraphing that the balance sheet reduction was coming and the pace was around $100 billion, so the $95 billion figure was initially seen as accommodative,” he said. writing.

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About the Author

Yael Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She has also worked as a VP/Senior Content Writer for major New York-based financial firms, including New York Life and MSCI. Yael is now independent and most recently co-authored the book “Blockchain for Medical Research: Accelerating Trust in Healthcare”, with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in journalism from New York University and one in Russian studies from Toulouse-Jean Jaurès University, France.