Fed is expected to raise its policy rate by another 0.50% and continue to send aggressive signals after inflation hit a new four-decade high (Business Brief No.3973)

At the Federal Open Market Committee (FOMC) meeting, June 14-15, 2022, it is expected that the US Federal Reserve (Fed) will raise its policy rate by another 0.50 percent as earlier signaled. Moreover, it will continue to place emphasis on the inflation risk as hovering inflation will unlikely ease over the near term. Headline inflation, based on the Consumer Price Index in May 2022, hit a new four-decade high of 8.6 percent YoY. It was beyond expectations of the markets as they viewed that the US inflation rate had already passed its peak and was set to cool down. Given this, it is expected that the Fed will signal a more aggressive monetary policy to stem inflation. At the upcoming FOMC meetings in June and July, the Fed will likely increase its policy rates by another 0.50 percent as earlier signaled, while the Fed might also signal another 0.5 percent rate hike after the July meeting. The US central bank will continue to monitor the development of inflation and the US economy at each of the FOMC meetings.  

Although the Fed will try to engineer the US economy towards a soft landing, pressures from soaring inflation may prompt it to implement a more aggressive monetary policy, going forward. For this reason, the US is bound to experience additional economic risks.  We, at KResearch, are of the view that the US will likely experience a recession ahead although the chance is slim during 2022 as the overall US economy remains sound; this is thanks to its robust labor market while consumer spending is set to record steady growth, albeit at a slower rate. Nevertheless, the US could be heading to recession in 2023 because of fewer drivers, and economic risks will likely increase, including high inflation. Additionally, the Fed’s tight monetary policy may not only put pressure on domestic consumption, which is one of the US economic drivers, but also its capital market and those elsewhere.