What if the Fed had signaled that the rate hike will stop soon?
A key feature of the May FOMC statement is that, unlike in March, it was not accompanied by forecast material, but that does not mean that the Fed staff did not discuss – and revise – their economic and inflation forecasts. Recall that FOMC stands for Federal Reserve Open market Committee, and deals with US monetary policy decisions. Today everyone is claiming that the Fed is in an extreme rush to raise rates. It may be true, but this is true for today. And tomorrow?
Indeed, as the "Staff Economic Outlook" section of today's minutes reveals, "the staff projection for PCE price inflation was revised slightly upwards in the second half of 2022 and 2023, in response to the slow resolution of supply observed in the first part of 2022, at a higher expected path for import prices and the judgment that wage increases would have exerted greater upward pressure on service prices than previously assumed ” . Overall, the minutes concluded, “ total PCE price inflation was forecast at 4.3% in 2022. PCE price inflation should then fall to 2.5% in 2023 and 2.1% in 2024, as the imbalances between supply and demand in the economy will reduce due to the slowdown in aggregate demand and the anticipated easing of supply constraints ” .
These words are very interesting. While most Fed officials agree that the central bank will continue to make interest increases of 50 basis points (0.5%) over the next two meetings, this restrictive strategy could close earlier than expected.
If the FOMC forecast is accurate, it would imply that the next three expected half-point rate hikes would represent the end of the current round of monetary tightening and this could be the basis for an improvement in stock market index value towards the end of 2022.
So if the Fed sees a drop in inflation between now and September it could also judge that its monetary tightening activity has reached its target and thus could halt interest rate hikes. At that point the stock market indices would have already deflated and could have a recovery. So the essentials to keep an eye on are inflation rates and the production bottlenecks that caused them. If these two points were dissolved surely there could be good prospects. The fact that there will be rates soon does not mean that they will continue for long.
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The article What if the Fed had signaled that the rate hike will stop soon? comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/se-la-fed-avesse-segnalato-che-laumento-dei-tassi-si-fermera-presto/ on Thu, 26 May 2022 06:00:48 +0000.