It’s rare to have four major central bank meetings within three days, but that’s what we were treated to this week. The decisions taken will set the tone for the second half of the year.
The Federal Reserve raised its overnight interest rate by 75 basis points on Wednesday. This was a larger move than they had previewed last month, but it was justified by troubling news on inflation and inflation expectations. The forecasts released by the Federal Open Market Committee (FOMC) suggested that interest rates would close the year at around 3.5%, significantly higher than their expectations of three months ago.
We now expect the FOMC to raise rates by 75 basis points next month and by 50 basis points in September and November. Those actions, combined with planned reductions in the Fed’s balance sheet, will certainly tighten financial conditions. In anticipation, U.S. interest rates have been rising and volatile over the past two weeks.
Fed Chair Jerome Powell was asked during his press conference whether monetary policy can tame the price level, given that so many sources of inflation (war in Ukraine, zero-COVID policy in China) are outside of the Fed’s control. Increasingly aggressive restraint also raises the risk of a recession next year, although that is not the Fed’s (or our) base case. Achieving a soft landing “is not going to be easy,” said Powell.