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Powell Hints At 50 Basis Points Hike In Interest Rates This May



Iinterest rate hike and Fomc meeting on paper with dlooar bank note hang on sieve | Powell Hints At 50 Basis Points Hike In Interest Rates This May | featured

Federal Reserve Chairman Jerome Powell expects the agency to implement a 50 basis points hike this May. This is part of the central bank’s objective to aggressively bring down inflation to more manageable levels.

RELATED: How To Deal With The Upcoming Federal Rate Hikes

Expect a 50 Basis Points Hike This May

Businessman presses button interest rates on virtual screens | Expect a 50 Basis Points Hike This May

Powell joined an International Monetary Fund panel that spoke with CNBC. He said that he thinks that the agency might need to react faster in order to arrest inflation.

He said that it’s ”appropriate in my view to be moving a little more quickly” to raise interest rates. Powell added that “50 basis points will be on the table for the May meeting.”

By 50 basis points, Powell refers to a basis point that equals 0.01%. This means that a 50 basis points hike means an additional 0.5%.

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The Fed Reserve chairman and other officials feel that this rate will help bring down inflation that’s running at its fastest pace in over 40 years. 

Market Pricing Moves Aggressively After Powell’s Remarks

Meanwhile, market pricing for rate increases went along with Powell’s remarks and started moving aggressively as well. According to the CME Group’s FedWatch, expectations for a 50 basis points hike in May rose to 97.6%.

Traders also priced in another hike that would push the total to 2.75% by end of the year. The Fed’s fund rate sets the overnight borrowing level for banks. Many consumer loan products also get their cue from the Fed fund rate.  

As a result, stocks fell from the perceived rate hike this May. The Dow Jones Industrial went down more than 400 points in reaction to Powell’s announcement.

Meanwhile, Nasdaq also went down by more than 2%, as the rate-sensitive tech stocks braced for decreased spending. In addition, Treasury yields went up higher at 2.9% for benchmark 10-year yields. 

Fed Raised Rates to 2.5% Last March

Actually, the Fed already made its first interest rate hike last March. During its most recent meeting, the Federal Open Markets Committee approved a 25 basis points hike.

This adjusted the Federal fund rate from near zero to 0.25 to 50%. However, many Fed officials admitted that the opening hike is nowhere close to bringing down inflation.

Last March, the US recorded a year-over-year inflation rate of 8.5%. This means that prices of goods are 8.5% more expensive than they were in March 2021. The 8.5% rate is also the fastest inflation rate recorded since December 1982. 

“Our goal is to use our tools to get demand and supply back in sync, ” Powell said at the time. This is “so that inflation moves down and does so without a slowdown that amounts to a recession.

I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy. It’s going to be very challenging. We’re going to do our best to accomplish that,” he added. “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”

Is It Too Late To Raise Rates

During 2021 when inflation rates began creeping up, the Fed initially resisted moves to jack up interest rates.

Even as rates went beyond the ideal 2% threshold, the Fed allowed inflation to go higher in the interest of achieving full employment.

Maximizing employment is also one of the Federal Reserve’s two objectives. However, the agency made a fatal error when it let inflation run too long.

For over a year, officials insisted that high inflation was “transitory” and that improvements in the supply chain will bring down prices. By the last quarter of 2021, Powell had to admit he was wrong. 

The next FOMC meeting will be on May 3 and 4. This meeting will set the interest rate, which Powell now anticipates as 50 basis points. Along with the rate hikes, the Fed will also start reducing its appetite in buying and holding bonds. 

Watch the CNBC television news video reporting that Fed Chair Jerome Powell says “Nothing would prevent 50 basis point interest rate hike at the May meeting.”

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