The Federal Reserve will begin the week with a campaign to conquer inflation over the next few months, with Chair Jerome Powell expected to be more aggressive after prices rose with the Ukraine war.
The aggressive approach of the Federal Reserve
Powel and the team, who were already pivoting monetary policy amidst the fastest consumer price rise in the last four decades, now have to deal with the economic fallout of the war. With the public backing by Powel for a shift to increase the rates, an imminent hike of 25 basis points on Wednesday is sure.
Russia’s invasion has compounded the pressures on inflation caused by pandemics and cause of worry. The cost of fuel, food, and metal has soared after the war, gasoline is at a record high, and many services’ prices are already high.
President Joe Biden’s license to Powel to be hawkish and increase the rate for the first time since 2018 with support from fellow Fed officials and lawmakers has left the household and businesses increasingly anxious to avoid the repeat of 1970s type of price shock that could squeeze their spending power.
Powell’s press conference on Wednesday after the rate hike decision will give clues on how much the rates can go up from here and how quickly the officials implement it. According to Goldman Sachs’s prediction, officials will stop the rates after it rises to 3 % next year.
The central bank of the U.S. will start tightening the campaign with an actual rate hike after adjusting nominal rates with inflation. If the inflation runs longer, that will result in more roads to cover to set a neutral policy that does not slow or speed up growth.
As per Bloomberg News, SGH Macro Advisors, Chief U.S. economist Tim Day, sees risk of slower growth from higher inflation. He said that if Powell could bring back inflation to a reasonable level and maintain high growth, he would be considered a legend.
The focus is on Powell, whether he can keep his options open by taking a hawkish stance or talking about the need for flexibility given the uncertainty caused by the war. The call is not easy as forecasters see a slowdown in 2022 with lower fiscal spending. On Friday, a survey by the University of Michigan showed that consumer sentiment would be most downward since 2011 after a spike in fuel prices and inflation that does not augur well for spending.
Fed officials want to see the balance sheet affects the financial condition that has tightened since the war began. The officials are expected to announce how they will shrink the balance sheet at the meeting and what date they want the process to start. The pace of tightening would reduce the level of hiring. The Fed also has to maintain the price stable as patience is thin outside and inside the central bank.
