Tuesday sees the Federal Reserve hosting a meeting that’s widely expected to roll back the help offered to the US economy amid the pandemic. Expectations are that the Fed will introduce the first of many interest rate increases in the face of the worst inflation in decades.
The Fed has long been planning an initial interest rate hike of a quarter of a percent, but the backdrop of a war in Ukraine has made the decision much more difficult. When coupled with a slower-than-expected economic recovery and a haphazard stock market, it has raised questions about whether now is the right time to raise interest rates.
However, the market has long-been expecting the interest rate rise, and it’s just one of seven interest rate hikes that are projected to follow in 2022. All of this is being done in a bid to stave off the worst inflation in the US since the 1980s.
Markets have been jittery ahead of the hike and it’s led to a particular reluctance to invest in riskier assets such as big tech stocks. As such, investors are caught between perceptions that a quarter percent rise in interest rates will be hawkish or dovish. With major tech brands suffering from cataclysmic falls in stock price value, the Fed will aim to introduce interest rate rises in a way that doesn’t cause undue market volatility.
It’s a complicated picture facing the Fed, and the issue of interest rates won’t be the only matter dominating the meeting. There are expected to be further adjustments to how the Fed estimates figures in the US for unemployment, inflation and gross domestic product.
Getting a grip on the spiraling inflation rate remains a critical concern. With December seeing the Fed woefully underestimating the rate of inflation to be just 2.7% in 2022, it’s expected that the meeting will propose a new estimate will be drawn up that sets the expected inflation rate to be 4% for the year.
The estimated gross domestic product for 2022 is also going to face reevaluation with the ongoing crisis in Ukraine causing further uncertainty. Already, some estimates have put the growth of GDP at being just 0.5% in the first quarter of the year compared to the expected growth of 4%.
It remains to be seen how the Ukraine war will affect supply chain issues that have dramatically pushed up the price of everything from food to energy. The Fed has also been experiencing difficulties charting the employment levels in the US as the nation aims to rebuild following ravages of the pandemic.
There will also be big questions about when the Fed will start rolling back the bond holdings. It’s a process that isn’t expected to launch until summer but will once again signal how the US economy is only just starting to get back to normal amid the overall global uncertainty.
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