US Federal reserve to raise rates as economic slowdown worsens

The Fed is expected to raise its benchmark interest rate by 0.75 percentage points. This Wednesday boost is reportedly to address excessive inflation. This decision has shifted the Federal Reserve’s officials’ focus towards significant signals of a probable economic slowdown.

The U.S. Federal Reserve is widely anticipated to increase its benchmark interest rate by three-quarters of a percentage point. This hike, to be implemented on Wednesday, is said to be in order to combat high inflation. 

Despite signs of ongoing business investments, U.S. Fed to raise its target funds rate

The Department of Commerce announced on Wednesday that there was an unexpected increase in orders for durable goods in the month of June. This was positive news for the Fed as it is a sign of ongoing business investment. Additionally, the department’s estimates for retail inventories and exports in the previous month were robust.

In spite of this, it is expected that the Federal Reserve will raise its target federal funds rate. This will be the central bank’s primary instrument for bringing inflation down from a four-decade high. Such a measure will bring the Federal Reserve to a sort of mile marker, as it will reach a level of approximately 2.4 percent. 

Federal Reserve’s policy rates pre and post the pandemic

A little more than four months ago, the Federal Reserve policy rate was very close to zero. It was buying bonds for billions of dollars every month in order to assist the economy in recovering from the COVID-19 pandemic.

Despite the fact that there hasn’t been much progress made in the fight against inflation so far, there are growing indications of economic strain. This raises the stakes for Fed officials as they try to determine how much more stringent monetary policy needs to be in order to slow price increases while balancing the possibility that going too far could cause the economy to enter a recession.

Investors predict that the Fed would raise interest rates by 1% to tackle inflation

Resultingly, investors have estimated a one-in-four chance that the Fed would surprise markets with a larger 1-percentage-point increase in its standard overnight interest rate.

This increase may be similar to the hikes implemented by former Fed Chair Paul Volcker in the early 1980s. As the Federal Reserve’s influence on the economy becomes increasingly obvious, the question that arises is whether or not it runs the risk of overdoing it.

Likelihood of recession hinted at by U.S. Treasury notes increase

With yields on 2-year U.S. Treasury notes now higher than they are for 10-year Treasuries, parts of the U.S. bond market are signaling an increased likelihood of a recession. This may be a sign of lost faith in near-term economic growth. 

Walmart Inc (WMT.N), whose huge footprint offers a broad view of customer behavior, lowered its profit outlook late on Monday. Stoking fears of a thwarting economy, Walmart stated that inflation had forced consumers to spend their money on food and petrol. Consumers are spending on essential items instead of higher-margin discretionary items such as gadgets and apparel.

General Motors Co (GM.N), for its part, reported that it has reduced hiring and postponed planned spending. General Motors did this in reaction to inflation as a hedge against the possibility of a broad economic slowdown.

The Department of Commerce may report high unemployment this month or continue its robust job creation

It is anticipated that the Department of Commerce of the United States will report on Thursday that the GDP expanded at a sluggish pace in the second quarter, and possibly even declined. 

The economy of the United States is likely to have shrunk in the first half of the year. Greg Daco, a chief economist at EY-Parthenon, noted that businesses are doing the same thing. Right now, the United States of America is “a world of paradox.”

Read more: European Central Bank hikes interest rates to tackle high inflation