Dear Mr Powell, Regarding US Interest Rate Hikes
Dear Mr Powell,
Its almost the first anniversary since The Fed opened the first salvo, leveraging on the Monetary Policy it has access to in an attempt to mop up the excess liquidity generated during 2020 and 2021.
It seemed to have taken effect in the course of H2 2022 as both CPI and PCE have continued to rise at a decelerating momentum and downwards trend (refer to below chart).
Upwards trends of CPI & PCE in Jan 2023
Despite the good intentions of “soft landing” in the course of delivering the 8 interest hikes (including Jan 2023); US market remained defiant and relatively tight.
This is evident by the tight labour market (Non Farm payroll report) and strong Gross Domestic Product (GDP) for Q4 2022. (refer to below two diagrams)
US Non Farm Payroll Jan 2023 - statistics compiled in Feb 2023
US Q4 2022 GDP - Latest taken in 2023
I know part of the challenge for The Fed is the lagged effects of monetary policy rolled out.
General consensus is that the restrictive effects of higher interest rates aren’t fully felt by the economy until around a year later.
As gathered from FOMC Minutes of meetings, The Fed believes that rates are sufficiently restrictive currently, and is now fine-tuning interest rates as economic data comes in.
However, given the fact that both Jan 2023 CPI and PCE are showing signs of defiant growth bucking the downwards trend again, would it be a win-win situation for the Fed to collaborate with the Treasury Department for a more sustainable outcome ?
Wouldn’t you agree that there will be more synergy if both monetary policy (exercise by The Fed) and fiscal policy (exercise by The Congress) to be implemented, are progressing in the same direction versus opposing directions ?
Along the same vein, would it be better to swallow a bitter pill and implement a “0.5%” hike in the next FOMC meeting instead of letting the state of affair dragging its feet without concrete inflation-beating results ?
This is why in a “perversed” sense, it was a “relief” to learn that the probability of The Fed hiking interest by 0.5% increased by 2 folds after Mr Powell’s semi-annual testimony before the Senate Banking Committee.
This should be a more “effective” halt; a jolt to the US economy engine and yes, the market is unlikely to welcome this movement.
By implementing by March 2023, it allows the US economy to have a longer runway for the lagging effects to run its course and forces inflation back; closed to the 2% target by end Q3 2023.
The current GDP should be able to withstand a “0.5%” hike in the short to medium term without dire consequences or repercussions - don’t you agree ?
For your serious considerations and quick action. Time and tide waits for no man.
A Tiger Broker investor in the US market.
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