Would the US Fed raise rates up before September ends?

At the November meeting of the Federal Reserve, the American Central Bank, it is anticipated that a fourth straight 0.75 percentage point rise would be put into effect. A former Governor of the Reserve Bank of India claimed that the Fed would be put to the test if inflation continued to be high while overt signals of weakness appeared in the larger economy. When the economy is poor, the situation becomes considerably more challenging, yet there are still grounds to take more stringent action.

Officials of the Federal Reserve are under pressure to back up their hawkish signalling with a fresh set of interest rates that will be released this week, in order to demonstrate that they are serious about stifling rising inflation. In an effort to cool down the overheated US economy, the Federal Open Market Committee is anticipated to hike interest rates by at least three-quarter percentage points on Wednesday following its two-day policy meeting. This choice would increase the federal funds rate to a new target range of at least 3 to 3.25%. 

Bank of America Head of Global Economics Research Ethan Harris said: “The message needs to be that they don›t see an end of the tunnel in terms of rate rises.” Less important than how large the rate changes will be is how long-lasting they will be. Official forecasts for inflation, unemployment, and growth will also be included in the revised projections, the first since June.

The Fed’s June predictions, according to some, are “not realistic”. These predictions showed that the US Central Bank was sure it could achieve a soft landing in terms of a reduction of inflation without suffering serious economic harm.

The Fed’s drive to tighten monetary policy is the most aggressive since 1981. The policy rate is anticipated to grow to around 4% in 2022 and reach its highest point in 2023, according to the median prediction. In June, policymakers forecasted that the fed funds rate would rise to 3.4% by year’s end and 3.8% in 2023 before falling in 2024.

The near-term inflation prediction is anticipated to increase somewhat and authorities are anticipated to more openly accept that growth and employment will suffer more than they had anticipated at the outset of the summer.

They predicted at the time that the unemployment rate would gradually rise to 4.1% by 2024. According to a recent Financial Times poll of leading economists, it is now hovering at 3.7% and is predicted to reach that level by next year. The main worry is that supply issues will keep fuelling inflation, necessitating additional action from the Fed to keep it in check. 

Housing and labour supply are restraints that will not be short-lived, and they generate a lot more distance that the Fed needs to go. Many economists warn that the credibility of the Fed is in jeopardy, particularly after certain doubts about its determination to compress the economy severely enough to eradicate inflation. Last month, at the annual conference of central bankers in Jackson Hole, Wyoming, Fed Chief Jay Powell made his most hawkish speech to date to allay such worries.

Some analysts contend that the Fed raising rates by a full percentage point this week would strengthen its resolve to reduce price pressures, particularly in light of August’s worrisome inflation figures. According to CME Group, traders in fed funds futures contracts have set the probability of such an event at only 20%.

Instead, most economists anticipate that the series of significant rate increases will continue through September. Regardless of by how much and when the rate increase comes, everyone will be affected by the rate of a greenback – making it a game of chicken for banks across the world.