🧨The Fed Took a Bold Move🛎

It’s all over the news. First, the Fed decided to raise the interest rate by 0.75%, pushing the range of 1.5% to 1.75%. It is by far the most significant increase since 1994 as it works to tame the inflation at a 40-year high. 

The Ukraine war is hurting food and energy prices, while the lockdown in China is exacerbating supply-chain woes. Uncle Powell hammered through the message that another 0.75% hike in July is possible if inflation data remains elevated. 

😍Markets Cheers on Certainty🌴

A sense of relief came when he commented that the rate increase of 0.75% was not a “common” scene. With the action and guidance provided, there is lesser tension and more visibility of the Fed’s course of action. This allows market participants to return to the equity market and takes some heat off the selling pressure. 

 💊Is raising inflation an antidote🧸

Pika World maintains the stance that dark clouds are still on the horizon. First, the reduction of the balance sheet and the aggressive rate hike are double combo tightening. While a critical reason for slower growth is a high inflation situation that eats into consumers’ and businesses’ spending, Pika World believes that a higher rate will not have a powerful effect to reduce demand on demand for inelastic items, in particular, food and energy. 

Moreover, we continue to see home prices rising despite the demand falling, giving a higher mortgage rate. Hence, the downside risk is stagnation, when growth falters and inflation persists. Ultimately, this raises the odds of a recession by driving credit costs upwards and pushing risk asset prices.

⏰The Fed is aware of higher inflation ahead🔦

Talking about guidance, one cannot ignore the new economic projections. The Fed raises its inflation forecasts but is confident that prices can fall back to the 2% target by 2024. There is also a cut of its GDP through 2024, and there is still a sign of growth where it sees the unemployment rate rising to 4.1% in 2024. 

On the dot plot, FOMC members are seeing interest rates going to 3.4% by the end of the year. Hence, this may hint at another 1.75% rate hike for the remaining 4 meetings. 

Overall, Pika World remains cautiously pessimistic on the path ahead while we wait for more economic data to support a peaking inflation narrative.