The US Federal Reserve will hike interest rates for the first time in over three years on Wednesday as the central bank takes the first step in shifting policy from supporting the American economy through the pandemic to taming runaway inflation.
Fed Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) are widely expected by experts to send rates 25 basis points higher.
Some economists have even placed bets on the FOMC voting to lift rates 50 basis points on Wednesday to send a strong signal to markets that the central bank is serious about getting a handle on historic high inflation.
Figures published last week revealed the cost of living in America climbed to its highest level in over 40 years, hitting 7.9 per cent last month, well above the Fed’s two per cent inflation target.
However, surging energy prices triggered by Russia invading Ukraine has raised the risk of Western economies being spiked by a bout of stagflation, where growth stalls but prices continue to rise.
“The war has raised energy prices, tightened financial conditions, and lowered growth prospects abroad, implying higher inflation and lower growth in the US,” analysts at Goldmans Sachs said.
“We suspect that the FOMC will be reluctant to consider a 50 basis point hike until downside risks to the global economy from the war diminish,” they added.
The likes of the Fed, European Central Bank and Bank of England are facing tougher than usual judgement calls over where to send monetary policy as a result of the conflict between Russia and Ukraine.
Tighter policy tends to rein in economic growth, but clamps down on price rises, meaning officials need to weigh up whether eradicating high inflation is more valuable than protecting the economic recovery from the pandemic and damage caused by the conflict.
The Bank will announce its next interest rate decision on Thursday. Threadneedle Street is also anticipated to lift rates 25 basis points to 0.75 per cent.
The Fed will look through the oil and gas crunch’s impact on the US economy and push through one of the quickest rate hike cycles in recent memory.
Goldman thinks the world’s most influential central bank will lift rates seven times this year.
The Fed’s dot plot, which measures how many times the FOMC expects to lift rates this year, will likely average at around six, according to Wall Street analysts.