The Open Market Committee (FOMC), which is responsible for monetary policy, is reacting to the rapidly rising prices in the country with the turnaround in interest rates that was initiated in mid-March. The US inflation rate reached 8.5 percent in March, the highest level in more than 40 years, which is reducing the purchasing power of consumers. The Fed is therefore under pressure to tighten the reins further. Experts are eagerly awaiting what Powell has to say regarding monetary policy following the rate decision: “With just over seven months to go until the last Fed meeting this year, we’re eager for any indication of where the FOMC is headed by the end of the year,” says Ellen Gaske, senior economist at asset manager PGIM.
“Neutral Level”
She points out that a 50 basis point hike in interest rates on Wednesday is already a foregone conclusion for the market. Two further hikes of 50 basis points at the meetings in June and July are also anticipated in the courses. Ultimately, the decisive question is how quickly the Fed will raise interest rates to a “neutral level”. This means that interest rate zone with which the central bank neither stimulates nor slows down the economy.
Investors are speculating that an interest rate level of 3.0 to 3.25 percent might be reached by the end of the year. The US currency guard James Bullard even brought 3.5 percent into play. He believes the central bank is “behind the curve” even following the interest rate turnaround has been completed. However, during his much-noted appearance at the International Monetary Fund’s (IMF) spring meeting, Fed Chairman Powell left no doubt regarding the monetary authorities’ energy: “We are really determined to use our instruments to push back inflation.”
Melt down from May
The fight once morest inflation on the interest rate front is flanked by the planned maneuver to shrink the balance sheet, which has grown to almost nine trillion dollars: “In order to support the tightening, the Fed should decide to expand the bond portfolio – which was increased up until March – to be reduced significantly in the short term,” predicts Helaba economist Patrick Franke.
Fed Chairman Powell has signaled that the meltdown might begin as early as May. At the March meeting, a concrete timetable was also played through: According to this, the government bond holdings might initially be reduced by $60 billion a month and at the same time the stock of mortgage securities (MBS) by $35 billion. “The Fed will therefore collect liquidity of around 90 billion US dollars a month. It would only change course if private consumption were to be hit harder,” predicts VP chief economist Gitzel.