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.
ad IconAd Image

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!

Fed turns less hawkish, hikes just 25 bps

  • 03 Feb , 2023
  • 9:29 AM
  • The Fed has stuck to its promise of slowing on rate hikes and has hiked rates by just 25 bps.

The first meeting of the US Federal Reserve concluded on 01st February 2023. Indian investors cannot be blamed for missing the Fed statement in the midst of the flurry of activity caused by the Union Budget and the Adani Enterprises FPO cancellation. However, the Fed has stuck to its promise of slowing on rate hikes and has hiked rates by just 25 bps. This takes the rates to the range of 4.50% to 4.75%. Effectively, since March 2022, the Fed has hiked rates by a full 450 basis points. Fed has also affirmed that it sees another 2 rates hikes of 25 bps each taking the terminal rate to the range of 5.00% to 5.25%.

In the December 2022 Fed meet, the Fed had hiked rates by 50 bps, a slight departure after 4 consecutive meetings had seen 75 bps rate hike each. Now the February meet has further reduced its rate hike intensity to 25 bps. While the inflation has shown signs of coming down, the Fed would still be observing the core inflation data closely and also focusing on the labour data, which has been too strong for far too long.

A quick detour to what the CME Fedwatch is saying

CME Fedwatch reflects implied probabilities of future rate hikes based on Fed futures pricing. The table below captures the live probabilities of different rate levels after the various Fed meets in year 2023.

Fed Meet











Data source: CME Fedwatch

One thing is evident that the market is becoming less hawkish with the passage of time and to that extent, the Fed has surely managed a smooth communication with the markets. Now, the CME Fedwatch is also hinting at a worst case hike of another 50 bps from here. Here are some key takeaways from the CME Fedwatch probabilities.

  • The markets are factoring in another 50 bps of rate hike in the year 2023, but what we do see is a greater ambivalence between a 25 bps rate hike and 50 bps rate hike from here. Clearly macro GDP data will play a key role.

  • The probabilities have narrowed and the markets have called a top to hawkishness at a rate range of 5.00% to 5.25%. Markets don’t see the rates going really higher than that in the current year.

  • Despite the Fed minutes ruling out rate cuts in 2023, the CME Fedwatch is factoring in a likelihood of 25 bps to 50 bps rate hike in the second half of the year. Again, this would be contingent on the GDP data and the risk of a slowdown.

  • The broad trajectory for the terminal rates still remains in the range of 5.00% to 5.25% with a strong likelihood that rates could be cut in the second half. The markets are not ruling out rates below 5% by the end of the year 2023.

Two things emerge from the CME Fedwatch. The US central bank is still not done with hawkishness; at least till the impact on inflation is palpable. Secondly, the probability of a broad-based recession in the developed world is gaining ground.

What we read from the Fed statement

Here are some key takeaways from the Fed statement issued post the FOMC meet, late on 01st February 2023.

  1. The tone of the debate has now shifted from how much more rate hikes, to when the Fed rate hikes would stop. There is almost a consensus and that is also the indication from FOMC members, that rates may not go up more than 50 bps from current levels. 

  2. The rate hike intensity has tapered from 75 bps to 50 bps in December and further to 25 bps in February shows the FOMC is on a tightrope walk. It has played the inflation game too long, and now has to unmount without triggering inflation or a recession.

  3. However, despite indications from the CME Fedwatch, the Fed has not committed to any firm date or a firm terminal rate for the year. The only thing it has committed is that the rates would continue to remain high till inflation continued to be a macro challenge.

  4. Jerome Powell was quite insistent that rate cuts were not in the offing and even took pains to walk the fine line between the flow of data showing inflation in steady decline with the need to keep the public and investors sold on to the idea of rising rates.

  5. The Fed wants to rethink its rate hike policy only after the inflation showed distinct signs of moving towards the 2% mark. While the Fed has ruled out any rate cuts in year 2023, the CME Fedwatch even appears to factor in a likely 25 to 50 bps rate cut in this year.

  6. The Fed statement has pointed out that while inflation has tapered in the products segment, it is yet to taper in the services segment, which is what the Fed would like to see happening. Also, wages are too strong to support lower inflation.

  7. On the labour market, Powell has pointed out that more than 11 million jobs were added in the last 2 years and the unemployment rate is now down at a low of 3.5%. Unless this bounces, it is unlikely that inflation can start its journey towards 2% mark.

  8. One thing the Fed did affirm is the focus on inflation targeting. However, the Fed has assured that future hikes would only be in 25 bps each. The Fed is likely to complete the rate hikes in the first half of 2023 itself, giving them enough time for a relook, if needed.

One thing emerges from the Fed statement. This may not be the end of rate hikes, but it is surely the beginning of the end of rate hikes in the US. A lot will depend on inflation levels.

What are the takeaways for the Indian markets?

A key factor in this entire equation is how the RBI reacts to the Fed statement. For now, it looks like the RBI may pause in February and keep the options open for another 25 to 50 bps rate hike in subsequent policy statements. Fed stance has not been too clear, but it looks like the Fed may be just about 50 bps away from the terminal peak rates of interest. That is good news for the Indian markets as it circumscribes the overall risk.

In terms of FPI flows, the outflows have again resumed since the start of January 2023 with FPIs selling more than $3.52 billion in the first month of 2023. For now, liquidity is a concern and some toning down of valuations may be on the cards. For India it is time to focus on policies that are a lot more inward looking. A flow policy that is risk-off versus risk-on dependent is not going to work for India in the long run.


Image not found
  • 28 July, 2022 |
  • 10:19 AM

Ahead of the FOMC statement on 27th July, the debate was centred around whether the Fed would hike rates by 75 bps or 100 bps.

ad IconAd Image