The US Federal Reserve hiked interest rates by three quarters of a percentage point on Wednesday (June 15), its most aggressive move since 1994, in a bid to tame runaway inflation.
But the largest rate increase in a quarter century won’t deliver immediate inflation relief. It will take time for higher borrowing costs to ease price pressures.
That could mean more pain for Americans already digging into their wallets to pay more for gas, groceries and pretty much everything else.
One of the sectors the Fed has been watching closely is the interest-rate sensitive housing market, where prices have risen 38% since the start of the pandemic.
The surge has been driven by low borrowing costs, put in place by the Fed to cushion the economy from the COVID-19 pandemic, meeting an upswell in demand and a shortage of properties for sale.
Mortgage rates have already risen sharply since the Fed began signaling late last year it would likely tighten policy, with the average contract rate on a 30-year fixed-rate mortgage reaching 5.65% last week, the highest level since late 2008, the Mortgage Bankers Association reported earlier on Wednesday.
According to the latest data, consumer price inflation in the US increased 8.6 per cent year-on-year in May, which is the largest increase since December 1981 and followed an 8.3 per cent advance in April. The prices in the US accelerated on the back of high fuel prices and costlier food.
Natural gas prices in May jumped 8 per cent, the pace is the highest since October 2005, while electricity rate also rose 1.3 per cent. Food prices in May rose 1.2 per cent as part of the impact of supply chain disruptions due to the Russia-Ukraine war. Prices of dairy and related products also posted the largest gain since July 2007.
Given the latest inflation print of 8.6 per cent as against the US Federal Reserve’s target to control it under two per cent, most economists and analysts expect the American central bank to go for a 75-basis-point hike in the Fed fund rate. However, they said more than the rate hike, it’s the commentary that is important.
Markets are already pricing in a 95 percent possibility of another 50 basis point rate hike this time, according to CME Group. If the FOMC decides to raise the federal funds rate by another 50 basis points, the target rate will be between 1.25 and 1.50 percent.
On the other hand, most Wall Street companies – including Goldman Sachs Group Inc, JPMorgan Chase & Co and Barclays Plc – expect the Federal Open Market Committee to raise rates 75 basis points.
Inflation in the United States unexpectedly accelerated in May, putting pressure on the Federal Reserve to extend its aggressive string of interest-rate hikes.
According to Labor Department data released on June 10, the consumer price index (CPI) jumped 8.6 percent from a year ago. The closely watched inflation indicator increased by 1% from a month ago, beating all expectations. The most significant contributors were shelter, food, and gas.
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