According to investors, the Federal Open Market Committee (FOMC) is expected to maintain its aggressive monetary policy tightening strategy in its upcoming meeting on June 14-15. The Federal Reserve is expected to raise interest rates by 50 basis points (bps) for the second time in a row and continue to unwind its nearly $9 trillion balance sheet. The last time the Fed raised interest rates by 50 basis points (non-consecutively) was in mid-1994.
Meanwhile, US equities extended their losses on June 14, a day ahead of confirmation of a bear market in the S&P 500, as investors braced for aggressive interest rate hikes from the Federal Reserve this week.
What is the rate hike expected?
According to CME Group, markets are already pricing in a 95 percent chance of another 50 basis point rate hike this time. If the FOMC decides to raise the federal funds rate by another 50 basis points, the target rate would 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 the rate by 75 basis points.
However, Jeffrey Gundlach, chief executive officer of DoubleLine Capital, believes it will be too much. “The Federal Reserve should, in my opinion, raise the fed funds rate to 3% tomorrow,” Gundlach said in an earlier tweet.
An increase of two more 50 basis points, according to Fed Vice President Lyle Brainard, is “a fair kind of path.” According to Cleveland Fed Chair Loretta Meester, “as long as inflation is on the downside, an additional 50 basis point hike may be necessary.” Federal Reserve Governor Christopher Waller said he would not rule out a 50-basis-point rate hike until inflation is “closer to our 2 percent target.”
What are triggers?
Inflation in the United States unexpectedly accelerated in May, putting pressure on the Federal Reserve to extend an aggressive string of interest rate hikes. According to data released by the Labor Department on June 10, the Consumer Price Index (CPI) has increased by 8.6 percent compared to a year ago. The closely watched inflation indicator rose 1% compared to a month ago, beating all expectations. The most important contributors were shelter, food and gas.
The producer price index (PPI) for final demand in the United States rose 0.8 percent in May, following a slight decline in April data. The PPI rose 10.8 percent from a year ago, slightly lower than the 10.9 percent gain predicted by economists. It had fallen from a high of 11.5 per cent in March.
The Federal Reserve will also provide an update to its summary of economic projections, which will reveal what officials expect to go into inflation, unemployment, growth and lending prices over the next two years. Those insights will be baked into what Powell & Co. has indicated earlier: They expect another big rate hike in July to moderate inflation.
Three additional CPI data and three more personal consumption expenditure (PCE) indices are due to be released between June and September.
What is the impact of the future?
When the Federal Reserve raises rates, it effectively seeks to reduce the amount of money available for purchase. As a result, obtaining money becomes more expensive. Short-term lending rates of financial companies will increase. This will have an impact on almost all other lending prices for businesses and consumers.
As bills become more expensive, families will have less additional income when their bills become more expensive. Businesses’ sales and earnings decline when consumers have less discretionary spending money.
Buying a house or a car, or buying things with a credit card will become more taxing. In short, any type of debt will become more expensive to pay off. Also, savings accounts will be affected by higher interest rates. When interest rates are raised, banks respond by increasing the amount you earn on your deposit accounts.
High interest rates in the market can be harmful for the stock market. For public companies, higher costs and less business can result in reduced revenue and earnings, affecting their growth rates and stock prices.
Existing bond prices will drop immediately. Existing bonds will lose value as a result of higher overall rates, making their lower interest rate payments more attractive to investors.
impact on india
Higher interest rates in the United States will cause foreign institutional investors to exit emerging countries such as India. FII shares are estimated to have sold over $29 billion in fiscal year 2021-22 so far, of which more than 80% were sold between October 2021 and February 2022.
There will be a negative impact on the rupee-dollar exchange rate, leading to a devaluation of the rupee. Subsequently, the prices of imports of oil and raw materials will be more expensive. This would mean higher imported inflation and manufacturing costs as well as an increase in retail inflation.