Although some US stock indices continue rising and shares of some companies have already returned to their highs, fundamental factors remain negative for them. Notably, at the recent meeting, the US Fed raised the benchmark rate by 0.25% and was severely criticized for this decision. James Bullard said that a rise of just 0.25% was a mistake. Now, no one doubts that at the next meeting, the regulator will raise the key interest rate by 0.5%. Federal Reserve Bank of Richmond President Thomas Barkin also said that the Fed would take such measures if necessary. More and more members of the regulator vote for the 0.5% hike.
Thomas Barkin supposes that the US economy has faced new problems caused by the special military operation in Ukraine. Inflationary pressure has increased, thus causing the Fed to take tougher measures to stabilize prices. It means that the key interest rate should be raised faster. The US economic condition allows the regulator to take such a step. As usual, Jerome Powell remains very cautious. The fact is that the Ukrainian conflict is creating additional risks to the global economy. Recently, prices of oil, gas, and commodities have shown a significant jump. The more expensive materials for the production of almost all goods and services are, the higher the price of goods and services becomes. That is why by May, Jerome Powell may also admit the necessity to raise the benchmark rate at the needed pace.
Notably, the US inflation is still accelerating and it is still unclear when the Fed's action will provide a positive result. The neutral key interest rate is 2.5%. It allows the economy to avoid pressure and expand at the necessary pace. It means that until the key interest rate hits this level, inflation will remain intact. In the best-case scenario, the benchmark rate will hit the targeted level by the end of 2022. In other words, 2022 will be a year of high inflation.Meanwhile, Danske Bank emphasizes that the Fed may raise the benchmark rate by 0.5% at the meeting in May, June, and July. By the end of 2022, the Fed's rate will be at 2.5%-2.7%, the bank stated. Its experts still believe that a rapid monetary policy tightening will exert pressure on shares and risk assets.
