Fed hikes rates by 75 bps in July in big inflation fight

  • India Infoline News Service
  • 28 Jul , 2022
  • 9:05 AM
The Fed had skilfully built expectations of a likely 100 bps rate hike, so when the Fed actually hiked rates by 75 bps on 27th July, it almost appeared like manna from heaven. So much for managing expectations!

Chart Source: Bloomberg

However, that does not conceal the extent of hawkishness in the words of the Fed, nor does it take away the potent risk that the US economy could slip into a full-fledged recession. Jerome Power, in his statement, rejected talks of US recession. But, recession is not about perspectives but about data, and data is showing 2 consecutive quarters of weakness.

What would really worry markets is that the Federal Open Market Committee (FOMC), including the redoubtable Jerome Powell, appeared unperturbed by recession fears. Powell has confirmed that another similar hike in September was not ruled out, if inflation stayed sticky. Remember, Fed has hiked rates by 225 bps since March and 150 bps in last 2 months.

Peak rate expectations now converging to 3.75%

Here is a quick look at the CME Fedwatch implied probabilities. Rates have already risen from the range of 0.00%-0.25% to the range of 2.25%-2.50% between March 2022 and July 2022. Here are the implied Fed rate scenarios over next 8 meetings.

Fed Meet 275-300 300-325 325-350 350-375 375-400 400-425 425-450 450-475 475-500 500-525
Sep-22 65.0% 35.0% Nil Nil Nil Nil Nil Nil Nil Nil
Nov-22 Nil 53.4% 40.4% 6.2% Nil Nil Nil Nil Nil Nil
Dec-22 Nil 33.0% 45.3% 19.3% 2.4% Nil Nil Nil Nil Nil
Feb-23 Nil 25.7% 42.6% 25.0% 6.1% 0.5% Nil Nil Nil Nil
Mar-23 10.8% 32.8% 35.2% 17.1% 3.8% 0.3% Nil Nil Nil Nil
May-23 Nil 10.8% 32.8% 35.2% 17.1% 3.8% 0.3% Nil Nil Nil
Jun-23 10.8% 32.8% 35.2% 17.1% 3.8% 0.3% Nil Nil Nil Nil
Jul-23 10.0 31.2% 35.0% 18.4% 4.7% 0.6% Nil Nil Nil Nil
Data source: CME Fedwatch

Apart from the regular hawkishness, some interesting trends emerge.

·         With a record 150 bps rate hike in June and July, the Fedwatch is hinting at around 100 bps of rate hike more by the end of December 2022.

·         That means, with rates already in the range of 2.25%-2.50%, the markets are betting on more gradual rate hikes of around 100 bps over the next 3 meetings till the end of 2022.

·         As of July 2022, the Fed rates are already at neutral levels. Any hike beyond these levels would start to directly hit the economic growth, despite negative real yields.

·         It now looks like the Fed will not just front-load rates in 2022, but perhaps complete 90% of the rate hikes in 2022 itself. That gives room for corrective action, if needed, in 2023.

·         Powell has confirmed that the asset unwinding program was on schedule, so that would amplify the impact of rate hikes on growth and liquidity in the markets.

The gist of the FOMC statement for July 2022 was that rate hikes would be relentless till inflation came down to 2%. Of course, the unsaid portion was that all these would be circumscribed by the pragmatic considerations of economic growth.

What we gathered from the July 2022 FOMC statement

Here are some of the key takeaways that emerge from the FOMC statement and the subsequent elaboration issued by Jerome Powell, Chairman of the Federal Reserve.

a)      While hiking the rates by another 75 bps in July, Powell has underlined that a similar move was possible again, despite the fact that the Fed has hiked rates by 225 bps since March 2022 and by 150 basis points between June and July 2022

b)      Just to give a perspective, record inflation called for unprecedented hawkishness by the Fed. The hike of 150 bps in the Fed rate over just 2 months is the steepest rate hike since the aggressive anti-inflation era of Paul Volcker in early 1980s.

c)      The first signal of pragmatism comes from Powell’s admission that, going ahead, the Fed would be more data driven. That is understandable since between now and the next statement on 21st September, there will be 2 inflation and employment readings. Rate decisions would be taken more on a meeting by meeting basis.

d)      However, Citigroup has cautioned clients in a note that inflation in the US was unlikely to relent quickly and growth triggers may remain ambivalent. Hence, another 75 bps rate hike could not be ruled out in the forthcoming September 2022 meeting. The consensus is veering towards a 50 bps rate hike in September.

e)      At the current range of 2.25%-2.50%, the Fed rates are already at neutral levels ( a level that neither speeds nor slows down the economy). However, from this point, every rate hike would be taking the rates above the neutral rate with direct negative implications for growth. Inflation may eventually come down, but at the cost of weak GDP growth.

f)       On the subject of the US economy slowing, Fed is relying more on the strength in the labour market rather than worrying about the weak GDP growth indicated by the GDPNow estimates of the Atlanta Fed. That makes the Fed less likely to pause on rate hikes, at least till the end of 2022.

g)      The Fed reiterated its commitment to being “highly attentive to inflation risk”. That means, it would not relent on rate hikes till the time inflation gravitated closer to the 2% mark. That could come at the cost of economic growth, but that is a separate debate. However, Fed has committed to adjust the trajectory should risks to growth emerge.

h)      Even though labour data is still strong, high rates are already impacting appetite in the housing market where sales have slowed. In addition, Q1 has seen GDP contraction and Q2 is likely to be flat at best. Yield curve dipped into negative for the third time.

i)        Soft landing continues to be a debatable issue. While the Fed is confident that higher inflation would constrain spending and contain inflation, the market is sceptical and believes that it will take recession with mounting unemployment to slow inflation.

To sum up the Fed stance, they are looking at a period of growth below potential to create some slack, so supply side can catch up. While markets focus on GDP growth, the Fed is still focussed on strong labour markets. But what does this really mean for the Indian economy?

India must worry about too much hawkishness

In recent days, even the ECB has joined the hawkish club by hiking rates by 50 bps, something unheard of. India has already hiked rates by 90 bps and CRR by 50 bps. Till now, India is in neutral territory. But, going ahead, another 100-125 bps of rate hike by the Fed could create a real poser for the Indian policy makers.

IMF has already projected subdued growth for India and the world in 2023 and 2024. A slowdown in the US and China would impact India’s trade substantially as they are two of India’s largest trading partners. India has lived with FPI outflows for over 9 months without too much of a dent on the markets. The tougher job will be in the next 4 months!

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FOMC monetary policy report to Congress has hawkish hues

  • 06 Mar , 2023
  • 9:21 AM
  • On 03rd March 2023, the Federal Reserve Board submitted its report to the Congress elaborating on the conduct of monetary policy by the US Fed.

The Federal Reserve Act requires the Federal Reserve Board to submit the Monetary Policy Report semi-annually to the Senate Committee on Banking and to the House Committee on Financial Services. Typically, each year, this report gets submitted towards the end of February and then again towards the end of June. 

This Monetary Policy report submitted to the Congress makes the Federal Reserve Board accountable for its commitments and for the outcome of their actions. The Fed finds itself in a piquant situation at this point. For example, the inflation triggers are favourable in the sense that oil and commodity prices are falling and even food prices have tapered from the highs. However, the fall in inflation has not been as rapid as expected, and that is largely due to sticky core inflation. In addition, tight labour market is also making transmission of higher rates into lower inflation difficult. That is because, higher wages among the consuming population are offsetting the higher cost of funds brought about by Fed hawkishness. This is the background in which the report was submitted by FRB.

Monetary policy report broadly covers 3 areas viz. (1) progress on interest rates (2) progress on reducing size of Fed balance sheet and (3) Outlook for rates and inflation in future.

Federal Fund rate hikes have continued

The hawkish monetary policy of the Fed just about completes one year in March 2023. Between March 2022 and February 2023, the Fed has increased the interest rates from the range of 0.00%-0.25% to the range of 4.50%-4.75%. This 450 bps rate hike is not only the fastest pace of rate hike in just 11 months, but also it is the highest level of Fed Funds rate since the year 2007 (just prior to the global financial crisis). Between June 2022 and November 2022, the Fed hiked rates by 75 bps on 4 occasions. However, the rate hikes were toned down to 50 bps in December 2022 and further to 25 bps in February 2023.

However, the minutes of the February 2023 FOMC (Federal Open Markets Committee) clearly indicate a shift towards a more hawkish policy. The Fed has not only indicated the likelihood of another 50 bps rate hike in the forthcoming meeting, but has also hinted at a higher terminal rate of interest veering towards the range of 5.50% to 5.75% and even going up to 6% in a worst-case scenario. Clearly, Fed thinking on the trajectory of rates appears to have undergone a shift in 2023; and we shall see more of this aspect later.

Fed reduces its holdings consistently

When the Fed started the hawkish approach in March 2022, it was clear that it would combine rate hikes with winding down the assets on the Fed balance sheet. The idea was to amplify the impact of rate hikes with liquidity tightening so that monetary policy is more effective. Between June 2022 and February 2023, there has been a perceptible shift in the Fed balance sheet as the shrinking has continued at around $60 billion per month. That may sound paltry in the light of the $9 trillion Fed balance sheet last year, but it has surely helped balance inflation and liquidity in a meaningful way.

Securities Held by Fed 
($ billion)

February 22, 

June 15, 

Change in 
$ bn

Change in 
% terms

Treasury securities





Agency debt and MBS





Net unamortized premiums










Other loans and lending 





Other assets





Total assets





Data Source: US Federal Reserve

First a quick background to the building of the Fed balance sheet. During the global financial crisis of 2008, the Fed and other central banks around the world embarked upon monetary easing in a big way. The easiest way was to infuse liquidity in the market by buying treasury securities and mortgage debt. However, while this did infuse liquidity, it also expanded the Fed balance sheet. Between 2008 and 2013, the Fed balance sheet had expanded from $2 billion to $4 billion. However, since 2016, the Fed had been consistently pruning its balance sheet size; till the COVID pandemic changed all that.

When the pandemic struck in late 2019 and early 2020, the Fed had to once again resort to liquidity infusion to ensure that there was sufficient liquidity in the market so that growth did not suffer. However, this surfeit of liquidity had two implications. Firstly, it once again expanded the Fed balance sheet (this time to a whopping $9 trillion). Secondly, with too much liquidity sloshing around in the economy, the inflation started to go up sharply. That is when the Fed decided to amplify the rate hikes with balance sheet unwinding to address the challenge of persistently rising inflation. As can be seen from the table above, the Fed assets have shrunk by $550 billion (6.16%) between June 2022 and February 2023.

FOMC outlook on key economic indicators

The third and last part of the Monetary Policy report submitted by the FRB to the Congress is about the projections that the Federal Reserve has made for key macroeconomic parameters. The table below captures the Fed projections of key macros for the next 3 years, and the long-term sustainable rate.


2022 (%)

2023 (%)

2024 (%)

2025 (%)

Long Run (%)

Change in real GDP






September projection






Unemployment rate






September projection






PCE inflation






September projection






Core PCE inflation






September projection






Federal funds rate






September projection






Data Source: US Federal Reserve

The above table has two data points of note. Firstly, it shows the projected values of various variables for the next 3 years and the long run sustainable rate. In addition, the high frequency trends are also evaluated since each variable is also compared with the September 2022 projection. Here are some of the key takeaways.

  1. Real GDP growth is expected to stabilize at around the long-term rate of 1.8% by 2025 and sustain after that. However, on a short-term basis, the GDP growth for 2023 has been sharply scaled down from 1.2% to 0.5%, showing the impact of a likely slowdown.

  2. Unemployment is expected to stabilize at around 4% in the long run. In the short run, the unemployment has been projected to rise in 2023 from 4.4% to 4.6%. However, this looks far-fetched considering that unemployment is at a 50-year low of 3.4%

  3. The Fed has upped its PCE inflation projections and the core PCE inflation projections sharply for 2023 as compared to the projection in September 2022. However, Fed also projects the long term PCE inflation target of 2% by the year 2025.

  4. Finally, on the Fed rates, there is a lot more front-loading as the Fed Fund rate projection for 2023 is raised by 50 bps to 5.1% compared to 4.6% made in September 2022. Also, the long run fed rate has been pegged at 2.5%.

To sum it up, there are hawkish hues to the Fed Monetary Policy Report. The first half of 2023 should give a clearer picture of the monetary policy trajectory.

Will Fed hike 100 bps; perhaps Fed may be happy with 75 bps

  • India Infoline News Service
  • 22 Jul , 2022
  • 2:59 PM
The ECB has just hiked rates by 50 basis points for the first time since 2011. The US Federal Open Markets Committee (FOMC) is meeting on 26th and 27th July to decide on rate action. Between 03rd and 05th August, the RBI Monetary Policy Committee (MPC) will meet to set rates in India. But for now, the billion dollar question is whether the Fed would hike rates by 75 bps or 100 bps when it meets next week.
While the US consumer inflation at 9.1% for June 2022 made a case for a 100 bps rate hike, FOMC members are increasingly veering towards a more calibrated approach to rate hikes. Their apprehension is that if the rates are hiked rapidly and inflation is not controlled, it may impact the credibility of the Fed, which is bad. It could also result in a recession if the rates are too much above the neutral level of 2.50%, which is worse. It is between these two extreme views that the FOMC will take its decision on 27th July.

How Fed will handle the dual mandate?

The Federal Reserve currently has the dual mandate of ensuring maximum employment as well as price stability (regulated inflation). However, these two mandates can often be at cross-purposes and this is all the more stark at the current juncture. Currently the US economy is enjoying high employment but that comes with high inflation. That opens up two quandaries. Firstly, if the employment demand is more than supply, then high rates may not necessarily cool inflation. Secondly, since the US recovery is still nascent, the Fed would not want too much of inflation control to result in recession and loss of jobs.

While there are no simple answers, there were some specific insights on this subject coming from Governor Christopher Waller, when he addressed the Rocky Mountain Economic Summit. The only guide we have now is the CME Fedwatch, which is currently assigning a probability of 71.5% to a 75 bps rate hike and a 28.5% probability to a 100 bps rate hike. At least, the market believes that the bias of the Fed will be towards 75 bps only.

Inflation reduction remains the focus

In his speech, Chris Waller has underlined that controlling inflation and ensuring price stability will continue to remain the underlying theme of the Fed strategy and that would amply reflect in the July 2022 policy. Waller has highlighted that the biggest burden of inflation fell on the lower and moderate-income households that normally dedicate a larger share of their spending to necessities. As Waller rightly pointed out, managing inflation becomes critical for one more reason i.e. to effectively manage inflation expectations.

The crux of the debate is not about whether rate hikes beyond a point will reduce inflation? It has empirically proven that it will reduce inflation. The only concern is that, once the rates cross the tipping point, the negative impact on output and jobs may outweigh the positive impact of lower inflation. That is the real debate, which leads to whether the Fed would cut rates by 75 bps or by 100 bps in its July policy meet. The gist of Waller’s contention is that the two need not be in conflict and inflation can be controlled without compromising either on GDP growth or on employment levels.

But GDP has contracted for two quarters?

One of the popular measures of GDP momentum is the Atlanta Fed’s GDPNow, which captures real time data-driven projections of GDP growth in the US on a quarterly basis. US has seen -1.6% contraction in the March 2022 quarter and the early estimates of June 2022 quarter is of a -2.1% contraction. That is where, Waller sees a major dichotomy between the market view and the Fed view.

According to Waller, in such uncertain times, the Gross Domestic Income (GDI) gives a more realistic picture of growth compared to the GDP. For the first quarter ended March 2022, while GDP contracted -1.6%, the GDI actually expanded by 1.8%. According to Waller, the past experience has been that when there were such wide gaps between GDP and GDP, the two eventually converge. As Waller has explained, the negative GDP growth in the March 2022 quarter can be largely attributed to unusual trade-related reasons in the first quarter that are unlikely to be repeated. That is neutralized in the GDI calculations, which is why Waller gives more credence to GDI over GDP data.

One classic example is the shift from spending on goods to spending on services.

Focus will remain on persistently high inflation

Waller has highlighted that the focus will be inflation; first and foremost. With yoy consumer inflation at 9.1% for June 2022, it is consistently at a 41-year high. Waller has underlined that the Fed was committed to 2% inflation target in the medium term. As Waller admits, there are challenges to a rate hike driven philosophy. For instance, chunk of the current inflation is driven by supply side bottlenecks. Even, tight labour markets have contributed to the high inflation. Excess savings during the pandemic, combined with fiscal stimulus, boosted demand.

To quote Waller, “When your goal is price stability, you just want to reduce excessive inflation, irrespective of whatever the source lies in supply factors or demand factors. The bottom line is that high inflation reading would push up inflation expectations and in-turn keep prices high. That is the kind of vicious cycle that the Fed wants to avoid. For that, an aggressive rate hike policy should work very well.

Monetary policy ahead: 75 bps or 100 bps?

Since March 2022, Fed has raised rates by 150 bps, which includes the liberal 75 bps rate hike in June. For the July policy, the debate is over 75 bps versus 100 bps. According to Waller, higher rates will stifle business, but will not kill business. For example, after the June rate hike, home mortgage rates went up by 200 bps and there was also some slowdown in home sales. However, lenders and borrowers were still doing business, which indicates that markets were convinced about FOMC’s policy intentions.

Waller has underlined that 75 bps rate hike should do the job as it would take rates to the range of 2.25% to 2.50%; very close to the neutral rate that neither restricts demand not stimulates. However, he has also highlighted that a larger rate hike of, perhaps 100 bps, maybe warranted if retail sales and housing data showed that demand was not slowing adequately. At the end of the day, two words hold the key to rate hikes; the need to bring down inflation swiftly and decisively.


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  • 06 March, 2023 |
  • 3:37 PM

On 03rd March 2023, the Federal Reserve Board submitted its report to the Congress elaborating on the conduct of monetary policy by the US Fed.

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