Normally, the Federal Reserve hikes interest rates in quarter-point increments. However, these are not typical times, with consumer prices growing at their quickest rate in 40 years. It's also worth remembering that only two years ago, Fed officials predicted that interest rates would not rise until at least 2024. Investors are now anticipating six more interest rate hikes this year alone.
In 1994/1995, the Fed increased interest rates by half a percentage point or more in four consecutive sessions. This string of rapid rate hikes has contributed to financial market turmoil, with bond markets melting and hedge funds collapsing. The Fed was compelled to alter course and lower interest rates months later.
"There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level", Fed Chairman Jerome Powell said this week at a National Association for Business Economics event.
The Personal Consumption Expenditures price index increased by 6.4 percent in February compared to the same month the previous year, the fastest increase since January 1982. The index, which measures inflation in consumer expenditure and excludes volatile food and energy expenses, climbed 5.4 percent between February 2021 and February 2022. Since April 1983, this was the fastest growth.
The Federal Reserve's favoured gauge of inflation is the PCE index, and last month's figure was much below the central bank's objective of approximately 2%. The Federal Reserve hiked interest rates for the first time since 2018 earlier this month in a bid to cool surging prices.
Higher costs were sparked earlier in the COVID-19 epidemic by strong demand and supply chain issues. However, the global commodities markets have been thrown for a loop since Russia invaded Ukraine last month. According to the BEA, energy costs increased by about 26% in February. Despite a recent pullback, US oil prices rose about 9% last month and have soared even higher in March. The effect is being felt at the gas pump in the United States.
In terms of inflation numbers, the economic fallout from the Ukraine crisis will last longer than February. As the violence continues to damage the global agricultural supply chain, food prices, for example, jumped 8% in February and are anticipated to rise throughout the year.[a]
Most economists whose views are publicly available predict that inflation will peak in the first quarter and then gradually decline for the rest of the year. [b] It's unclear if February was the peak.
The research written by Deutsche Bank economists led by Matthew Luzzetti: "We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession."
Inflation is at an all-time high, with consumer prices growing at the quickest rate in 40 years. Hopes for a swift drop in inflation have been shattered, owing in part to the conflict in Ukraine.
The good news is that, unlike the last two downturns, Deutsche Bank does not expect a severe and painful recession. The bank predicts a "moderate recession" in 2024, with unemployment exceeding 5%. Even so, there would be a lot of job losses.[c] Unemployment peaked at significantly greater levels during the Great Recession, with 14.7 percent in 2020 and 10% in 2009.
Overview report prepared by Jozo Perić, Head of Portfolio Management Department and Investment Research Department
[a,b,c] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.
*Past performance is no guarantee of future results.
[1] FED, 1994, bonds: https://www.reuters.com/markets/europe/cruel-be-kind-fed-seems-tempted-by-1994-playbook-2022-03-23/
[2] BEA: https://www.bea.gov/news/2022/personal-income-and-outlays-february-2022
[3] DB and US recession: https://www.bloomberg.com/news/articles/2022-04-05/deutsche-bank-predicts-u-s-recession-in-2023-as-fed-boosts-rates
The content of this material constitutes marketing communication and should not be considered as any type of investment advice and/or investment research and/or a solicitation for any transactions. This material was prepared for informational/educational purposes only and does not imply an obligation to perform investment transactions nor does it guarantee or predict future performance. BCM Begin Capital Markets Cy Ltd and its relevant persons including affiliates, agents, directors, or employees do not guarantee the accuracy, validity, timeliness, or completeness of any information/data provided by third parties and assume no liability for any loss arising from any investment made based on the said information/data. Past performance is no guarantee of future results.
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