KUALA LUMPUR – MIDF Amanah Investment Bank Bhd anticipates that the United States Federal Reserve (Fed) will likely raise its interest rate to 3.4% by the end of 2022.
The investment bank believes that the Fed is tightening its interest rate rather than normalising it given its decision to hike interest rates by 75 basis points on June 15 this year. The current federal funds rate target range is 1.5% to 1.75%.
According to MIDF, the hike was higher than the anticipated 1.9%, a forecast made in March of 2022.
MIDF’s economic brief research note recently stated that the Fed’s fund rate was at 2.5% in 2019.
“The rush in tightening the monetary policy was because of the uptick in inflation trends,” it explained.
According to the MIDF, both the headline and core inflation had surged in the post-pandemic period due to the reopening of the domestic economy, disruptions in the global supply chains, and increased commodity prices.
The unemployment rate in the US dipped to a two-year low in May 2022, marking 3.6%. The S&P PMI readings had indicated business confidence was at an all-time high with the corporate community highly optimistic.
On the other hand, there have been signs of moderation in the economy as a result of inflation beginning to have an impact on consumption and the Fed tightening interest rate adding extra pressure.
It is demonstrated, for example, in the month-on-month (M-o-M) retail sales growth that has been on a decelerating pattern since January this year. It recorded its first contraction of -0.3% in May this year.
MIDF additionally said that surveys conducted on consumers showed an increase in pessimism. This was due to the fact that Michigan consumer sentiment dropped sharply to a record low of 50.2 in June this year while the IBD/TIPP Economic Optimism index dropped to 38.1, which was the lowest it had been in more than 10 years.
In line with the estimates of the Fed, US gross domestic product (GDP) growth is expected to grow slower at +1.7% instead of the initial expectation of +2.8%.
“Even with the signs of moderation, we believe the Fed will continue with its monetary tightening plan, bringing it to at least 2019’s level.
“In particular, the most cited inflation indicator, the core personal consumption expenditure inflation, is still higher than the target rate of +2.0% set by the Fed,” MIDF added.
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