Highlights

• As expected, the US Federal Reserve (Fed) hiked its key federal funds rate last night by 25bps to set a new effective rate in the range of 0.25% to 0.50%, after keeping it near zero since the pandemic started. St Louis Fed President James Bullard was the only one that voted to raise the rate by 50bps.

Key Takeaways

• We saw that officials were more hawkish as they were more concerned with stopping the economy from overheating compared to uncertainties caused by the Russia-Ukraine war on economic growth. Although Fed chair Jerome Powell told a press conference that there was no signal of a wage-price spiral while the risk of recession remained muted, two factors that policymakers must look out for in keeping the economy healthy. He added that the economy needed to maintain price stability in keeping the maximum employment sustainable, a tone that we believe bolstered the Fed’s stance in fighting inflation.

• The officials also have penciled in six more rate hikes this year and as the official projection stated, could begin to reduce its holdings of Treasury securities and mortgage-backed securities in one of upcoming meetings. Specifically, it may happen in May as Powell stated in the post-meeting press conference while noting that the reduction move will be more aggressive compared to the last time but the framework in executing it remained the same. To recap, in its last balance sheet reduction, the Fed cut the holdings by US$50bil a month.

• There were a few revisions made on their latest projections with the key rate now forecasted to hover around 1.90% by the end of 2022, 2.80% in 2023 and 2024, compared to 0.90%, 1.60%, and 2.10% in their previous projections, respectively. The GDP growth rate for 2022 was revised lower to 2.8% from 4.0% but it remained unchanged for the rest; 2.2% in 2023 and 2.0% in 2024. The Fed-preferred inflation indicator was also revised to a more elevated rate of 4.3% this year, 2.7% in 2023, and 2.3% in 2024 (previous: 2.6%, 2.3%, and 2.1%, respectively).

Source: AmInvest Research - 17 Mar 2022