Will the Fed screw up interest rate hikes?
The Fed has officially announced an interest rate hike of 0.50% — confirming what the market had expected. But what matters for investors is the Fed’s post-meeting comments…
What’s the big deal? Many argue that the Fed acted too late and should have raised interest rates earlier to bring inflation down.
Right or wrong, the Fed has a tough job ahead — trying to cool inflation without triggering a recession.
- Will they mess it up? According to Allianz Chief Economic Adviser Mohamed El-Erian — “The Fed is more likely to commit another policy error” from being behind in handling inflation (Politico).
- How can they mess it up? According to High Frequency Economics’ Chief U.S. Economist, Rubeela Farooqi, “One way to kill the economy is to kill demand by moving rates up too fast.” (Politico)
Researcher Lyn Alden (Twitter) thinks the Fed will “Tighten until something breaks.” Not a lot of faith out there.
Fed Chair Jerome Powell believes otherwise — saying there’s a “good chance” of a soft landing (i.e., no recession) as interest rates rise.
Thank you, JPOW: Powell’s post-announcement comments were enough to send the S&P 500 up 3%.
- Investors were worried about a potential 0.75% rate hike leading up to the announcement.
- But Powell said he isn’t actively considering a 0.75% rate hike and expects inflation to start “flattening out.”
The Fed will also begin offloading its $9T balance sheet on June 1.
Looking forward: Some analysts believe inflation has already peaked — and will fall “sharply.” Investors will find out on the next CPI report released on May 11— which will help dictate how fast the Fed moves with raising interest rates.