The Federal Reserve is raising interest rates in an effort to quell explosive price inflation this year, but international factors such as the Russian-Ukrainian war and China’s coronavirus containment measures may offset its monetary tightening and keep inflation high. into stagnant inflation.
Some observers believe the U.S. government may have misunderstood the looming threat of inflation. During the pandemic, the U.S. government has spent large sums of money to mitigate widespread economic damage at home. Analysts say the stimulus has led to strong household savings and a subsequent surge in demand for durable goods.
But the surge in demand brought global supply chains to a standstill and a bout of persistent inflation ensued. In March this year, driven by energy and food, the US consumer price index (CPI) rose 8.5% in March compared with the same period last year, the largest increase in more than 40 years. According to a New York Fed survey, investors believe the price hike is still far from over.
The only way to stop runaway inflation is very tight monetary policy, said Richard Fisher, former president of the Federal Reserve Bank of Dallas.
However, inflation is not currently spiraling as it has in the past. From 1965 to 1982, when inflation soared by nearly double digits, then-Fed Chairman Paul Volcker raised the benchmark interest rate by 4 percentage points at a time to stabilize prices, and then continued to raise interest rates sharply.
At that time, the strong monetary policy succeeded in containing inflation, but it also caused companies to transfer labor costs overseas. As a result, the labor income and corresponding productivity of American workers stagnated for 40 years, and the United States fell into stagnant inflation.
Now Fed officials are hoping to avoid such drama, but their plans could backfire because many of the sources of inflation are outside the central bank’s control, including the Russian-Ukrainian war, China’s coronavirus lockdown and other factors. The Fed plans to raise interest rates to a neutral level in 2022, forecasting between 2% and 3.5%.
According to CME’s FedWatch tool, there is a 99.8% chance that the Fed will raise rates by 2 yards (50 basis points) on Wednesday (4th), followed by a 3 yards (75 basis points) rate hike at its June meeting. It was 91%, up 19% from the previous month. Two rate hikes this week and expectations for a big hike in June could push the federal funds rate up to 1.5%-1.75% from the current 0.25%-0.5%.
Meanwhile, the U.S. on Monday 10-year Treasury yieldThe yield climbed slowly from 2.991% to 3%, and the 7-year, 20-year and 30-year yields rose above 3% respectively.