Kuwaiti newspaper newspaper | National Bank of Kuwait: The “Federal” will need to reverse the rise in interest rates

In recognition that the economy will likely have slowed significantly at that point

Last Wednesday, the Federal Reserve launched its largest broad-based attempt to combat inflation by raising benchmark interest rates by 0.75 percentage point, a move not seen since 1994, and at the end of its two-day policy meeting, the Federal Open Market Committee raised the benchmark interest rate to the target range. 1.50-1.75 percent, and indicated that it “expects that continued increases in the target range will be appropriate.”

Federal Reserve Chairman Jerome Powell said at a press conference after the monetary policy meeting: “Obviously, the 75 basis point rate increase was exceptionally high, and I don’t expect that amount of increase to be normal,” but he added that he expected to discuss a similar increase of $ 50 or 75 basis points in the next July meeting, pointing out that decisions will be taken “step by step” at each meeting, and the Federal Reserve will continue to “communicate our intentions as clearly as possible.”

The decision represents a surprising focus of the Fed’s pre-planned plans to raise interest rates for the second time in a row by 0.50 percentage points, which policy makers indicated before the start of the “blackout” period scheduled before the meeting, and Esther George, president of the “Fed” branch in Kansas City, was The only one that tweeted out the flock and supported adherence to previous guidelines.

FOMC members have signaled a much stronger path to raising interest rates in the future to stem inflation, which is moving at its fastest pace since December 1981, by one of the most commonly cited measures.

And according to the money markets report issued by the National Bank of Kuwait, the benchmark interest rate of the Federal Reserve is scheduled to reach 3.4 percent by the end of the year, according to the “Federal Reserve Voting Points Map on Interest Rates.”

This reflects an upwardly revised 1.5 percentage point from the March estimate. The committee sees the rate rising to 3.8 percent in 2023, a full percentage point higher than expected in March.

Notably, the median forecast for the federal funds rate in 2024 was 3.4 percent, indicating that the Fed will need to reverse the rate hike in recognition of the fact that the economy is likely to have slowed significantly at that point.

The rate hike came on the heels of two reports released last Friday that showed an unexpectedly large jump in consumer prices in May and rising inflation expectations, suggesting that Americans are becoming more concerned about the economic outlook.

“The committee is deeply concerned about inflation risks,” the Fed said in its policy statement, noting that the Russian invasion of Ukraine had created “additional upward pressures” on inflation and weighed on economic activity.

The statement added that the extended closures in China to combat the outbreak of the latest wave of the “Covid 19” virus contributed to the exacerbation of supply chain disruptions, which led to an increase in prices.

Officials have also significantly lowered their economic growth forecast for 2022, and now expect GDP growth of just 1.7 percent, compared to 2.8 percent in March. Inflation expectations, according to the personal consumption expenditures index, rose to 5.2 percent this year, compared to 4.3 percent, despite noting that the core inflation rate, which excludes the rapid rise in food and energy costs, reached 4.3 percent, an increase of 0.2 percentage points. Just above expectations. While the core personal consumption expenditures (PCE) inflation rate reached 4.9 percent in April, so last Wednesday’s forecast indicates an easing of price pressures in the coming months.

The new economic forecasts published by the Federal Reserve indicate that the monetary tightening measures to be implemented – which also include reducing the balance sheet, which amounts to about 9 trillion dollars – will entail “some suffering”, according to what he admitted at the beginning of last month. The Federal Reserve Chairman admitted that the path to reducing inflation without causing significant economic damage “will not be easy,” adding that the economic path set in the new forecast points to a “slowdown.”

Europe… emergency meeting

The European Central Bank held an emergency monetary policy meeting last Wednesday after bond yields rose in recent days in a number of eurozone countries. During its meeting, the bank announced its plans to devise a new tool to address the risks of differences in the cost of lending in the euro zone, in a move aimed at alleviating fears of a new debt crisis.

“Since the start of the gradual process of monetary policy normalization in December 2021, the ECB’s board of directors has pledged to act against the renewed risks of disintegration in the region,” the European Central Bank said in a statement.

The decision to call an emergency meeting less than a week after the last board vote underscores how concerned policy makers are that their goal to tackle record inflation in the euro zone by tapering economic stimulus packages in a crisis period may be veered off course, if bond market concerns return in the countries Which represents the weakest link in the economies of the region.

Although no details are available on how the ECB’s new instrument will work, some analysts believe it may be an updated version of the stock markets program that allowed the bank to address the European market’s borrowing cost differentials by purchasing 220 billion euros of sovereign bonds. During the period between 2010 and 2012.

Switzerland raises interest rates

In a surprising move, the Swiss National Bank raised interest rates for the first time in 15 years last Thursday, joining its peers in tightening monetary policy to counter rising inflation. The central bank raised the interest rate to -0.25 percent from -0.75 percent, which it has used since 2015, and the rise represents the first increase of the central bank since September 2007.

Swiss National Bank President Thomas Jordan stated that rising inflation – which reached its highest level in almost 14 years in May – means the central bank may have to act again. Even after an interest rate hike of 50 basis points last Thursday, the Swiss National Bank expects inflation in the first quarter of 2025 to reach 2.1 percent, far from the target set at 0-2 percent.

In 2022, the central bank expects the rate to reach 2.8 percent. “Without an interest rate increase in the SNB’s policy today, inflation expectations would be much higher,” Jordan told a news conference.

“This tighter monetary policy aims to prevent inflation from spreading more widely to goods and services in Switzerland, and it cannot be excluded that further increases in SNB policy will be necessary in the foreseeable future to stabilize inflation,” the bank said in a statement. Within the range compatible with price stability in the medium term.