Be prepared for strong interest rate hikes from the Fed

The market is thinking there is a more than 75% probability that the Fed will raise short-term interest rates from the current 0.25 – 0.5% to 0.75 – 1% when the US central bank meets on May 4.

A 0.5 percentage point increase is unusual. While it usually cuts interest rates by a similar amount to stimulate the economy, the Fed rarely raises rates so aggressively. The Fed often chooses to increase slowly, many times more than 0.25 percentage points to control inflation without negatively affecting growth or causing a recession.

The last time the Fed raised interest rates by 0.5 percentage points was in May 2000, right when the dot com bubble peaked. Before that, the Fed did not raise interest rates so aggressively since February 1995.

The positive March report will prompt Fed officials to act more urgently at the May meeting, according to Joseph Brusuelas, chief economist at RSM US.

Others think that the Fed must continue to maintain a strong stance through May.

Economists at Nomura expect wages to continue to grow and the unemployment rate to fall to 3.3% by the end of 2022. For these reasons, Nomura forecasts the Fed to raise interest rates by 0.5 percentage points in May, June and July.

Some experts wonder if the repeated aggressive rate hikes are “outrageous” because they do not address the rise in oil prices due to geopolitical concerns or the lingering effects of the pandemic – making chains Supply is tight, pushing up commodity prices.

“The Fed can’t influence Russia’s military campaign in Ukraine or its Covid-19 response policy in China,” said Megan Greene, chief economist at the Kroll Institute. “I worry the Fed will push the economy into a recession.”

Greene added that the market needs to acknowledge that there are many factors that are putting pressure on the market as well as the US economy. Any forecast on the current path of rate hikes could change in the next few months. She also dismissed concerns related to US government bond yield curve pairs, saying that the unemployment rate should be paid attention to.

“It’s hard to believe the Fed is planning to raise rates six more times this year and that won’t hurt jobs. I don’t think the Fed will raise rates as aggressively as people expect. The Fed may have to make concessions. There’s still a lot of uncertainty.”

According to Nhu Tam