US Fed maintains strong outlook for economy despite rate hike
Finally, the much awaited event of the quarter is over where the US Fed has moved ahead with its 25 bps rate hike, the first increase in three years, to combat decades high inflation. With uncertainty over, equities are witnessing a relief rally post the event.
Rising inflationary pressure and a strong labour market provided room for the Fed to start tightening monetary policy to end the era of easy money.
Most policymakers are expecting the federal funds rate to range between 1.75% and 2% by the end of 2022. To achieve this, the central bank has to raise interest rate by 0.25% in the remaining six policy meetings. Also, the Fed could finalise a plan to shrink its $9 trillion asset portfolio at its next meeting.
Targeting stubbornly high inflation, the Fed has started to walk on the path where interest rates inch northwards. This is anticipated to bring down inflation from 4.1% to 2.6% in 2023 and 2.3% in 2024. The outlook for GDP growth has been tamed down to 2.8% from the earlier 4% for 2022. However, policymakers continue to foresee solid growth as shown in Economic Projections. The median projection for real GDP growth is at 2.2% next year and 2% in 2024. This shows confidence that the US economy is very strong and well positioned to handle tighter monetary policy. Thus, with uncertainty on future interest rates getting clear with growth outlook maintained, we believe equities should be in favour.
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