UOB Kay Hian Bond Radar
US inflation is near its peak? The US Federal Reserve (Fed) hiked interest rates by 75 basis points to a target range of 1.5 – 1.75% on 15 June. This is the biggest rate hike since 1994 and the third hike this year.
FED is dealing with 3 problems at the same time with 1 tool (interest rate):
- Inflation is on fire;
- Potential recession and drop in the employment rate;
- A falling US stock market.
Can Fed tame inflation without triggering a recession?
To fight inflation, FED would increase interest rates while trying its best to avoid a hard landing to cause a recession. The bears think the Fed's plan to stop inflation is basically to start a recession that throws people out of work and therefore caps wages and reduces demand. Bonds and stocks are falling and investors are frightened. The stock market is not the FED's primary concern but Wall Street has a significant influence on Washington. Washington then puts pressure on the FED. It feels like the US FED is playing block tower and pulling the wrong piece will end up in a hornet's nest.