"Dark" cloud shrouded, the Fed raised interest rates in March to change?

(Finance and Economics) "Dark" cloud shrouded, the Fed raised interest rates in March to change?

　　China News Agency, Beijing, February 28 (Reporter Xia Bin) The market has strong expectations for the Fed to raise interest rates in March. Will the seemingly certain things change due to the conflict between Russia and Ukraine?

　　Inflation is a key factor in the Fed's monetary policy operations. From the data released in January, the US personal consumption expenditures (PCE) price index rose 6.1% year-on-year, higher than the 5.8% in December last year and the market's expected 6%, a record high. The biggest monthly gain since 1982.

　　The year-on-year growth rate of core PCE after excluding food and energy prices also rose to 5.2% from 4.9% in December last year. Although in line with market expectations, it was also the largest increase since 1983.

　　The persistently high inflation has not been eased, and the recent escalation of the conflict between Russia and Ukraine has become an important "variable" that the Fed has to think about.

　　Judging from current market expectations, data from the Chicago Mercantile Exchange's federal funds rate futures show that traders currently expect a 100% probability of the Fed raising interest rates in March.

Among them, the probability of the Fed raising interest rates by 25 basis points is 76%, and the probability of raising interest rates by 50 basis points is 24%.

　　For the Fed, the risk aversion from short-term financial market turmoil and the further inflationary pressure from a potential rise in commodities in the medium term are two opposing forces, according to a report from CICC Research.

Unless there is further systemic loss of control, it will be difficult to significantly change the probability of interest rate hikes at the near-end. Therefore, the start of interest rate hikes in March and giving a path to shrinking the balance sheet may still be a high-probability event, but the expectation of a 50 basis point rate hike has fallen sharply.

　　The report reminds that there is a potential risk that if commodity prices continue to rise in the follow-up, it will push up expectations of long-term interest rate hikes, and it will also increase the market’s concerns about a faster decline in future growth, which will not only increase the risk of “stagflation” Risks will also increase the difficulty of the Fed's monetary policy operations.

　　"Central banks generally don't like uncertainty. The Ukraine crisis has brought a lot of uncertainty to the U.S. economy and even the global economy. I don't know how much growth will be hit, and I don't know the trend of oil prices and inflation." Credit Suisse Managing Director Tao Dong, manager and senior consultant of private banking in the Asia-Pacific region, said bluntly that U.S. banks have relatively few loans to Russia, but risks remain because finance and markets are globally interconnected.

　　In his view, despite the above, the Fed has to start raising interest rates in March.

Inflation in the United States is very different now than it was a year ago, and rising wages and rents have brought high inflation stickiness, so the Fed must start raising interest rates, but it may need to be cautious.

　　"I think the Fed has the greatest chance of raising interest rates by 25 basis points this time, and then make plans based on the economic situation and geopolitical situation. The market's expectations for a 50 basis point interest rate hike in March have also cooled rapidly recently." Tao Dong said.

　　Judging from the statements of US officials, the rate hike should not fail, but the magnitude is still unclear.

San Francisco Fed President Daly said that inflation in the United States is too high, and the pressure of rising prices has begun to spread.

The timing and scope of tools to adjust monetary policy in the future will depend on economic data.

Despite geopolitical factors, a rate hike in March is still expected, but it is too early to tell how much this year will be raised.

　　US Richmond Fed President Barkin pointed out that it will have to see whether the Ukraine crisis will subvert the Fed's view on monetary policy.

Over time, it will become clear whether the situation in Ukraine will derail the Fed's view of monetary policy and the outlook for the U.S. economy.

(over)