US Fed Further Tightens up Monetary Policy
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
US Fed further tightens up monetary policy to rein in high inflation
The Federal Open Market Committee (FOMC) said in its March post-meeting statement that it “anticipates that ongoing increases in the target range will be appropriate.” Concerns over a 50bp rate rise were somewhat allayed by Fed Chair Jerome Powell’s remarks that no decision has been made, only to be reignited on March 21 when he said that the Fed will not be assuming significant near-term supply-side relief when setting policy. In other words, the Fed does not expect inflation to fall anytime soon from the easing of supply chain pressures, and therefore will stay on its hawkish course to address inflation.
The Fed may decide to go for a 50bp rate increase. The US is set to enter the tightest job market since 2001, with 1.7 job openings currently available for every unemployed worker. Real interest rates remain in negative territory. The Fed aims to stabilize the breakeven inflation rate (BEI) by moving real interest rates into positive territory within 1H22, giving it ample justification to go ahead with aggressive rate hikes. With the job market in good shape, it believes the US economy can withstand higher rates.
The low probability of US recession at this point is another justification for rapid rate increases. The US manufacturing PMI climbed 1.2pt MoM to 58.5 in March, showing improvement in manufacturing activities amid the easing of supply chain bottlenecks. The New York Fed’s Weekly Economic Index points to annual growth in the five percent range. The US economy is unlikely to fall into recession in the foreseeable future, based on major real economic indicators.