Skip to main content

Fed Rate Hike Looms and It Could be Bigger Than You Expect

Why surging inflation suggests the Federal Reserve must be aggressive in its rate hike this week.
  • Author:
  • Publish date:

With inflation intensifying thanks to surging oil prices on top of rebounding economic activity, pressure on the Federal Reserve at this week's meeting is growing as well.

The Action Alerts Plus team looked at the problem recently after purchasing manager indexes for February came in strong for both the U.S. and the Eurozone.

"While the market continues to struggle with the latest Ukraine-Russia developments, the February Flash Composite Purchasing Managers' Index for both the U.S. and the Eurozone are now out," the team noted.

"Inflation remains hot, and companies continue to boost selling prices to offset rising costs," the AAP team said. "On the one hand, the report confirms a pickup in economic activity as Omicron fades, but the inflation data means a more aggressive move by the Fed is looking more likely exiting its March meeting -- subject to what's happening on the geopolitical front.”

As to what the term “more aggressive” implies, the team wrote “we mean a 50-basis point increase.”

While Federal Reserve action to raise rates makes perfect sense in a high-inflation environment, the challenge is that U.S. government intervention can mostly affect U.S. businesses, banks and consumers. This is a problem when inflation is a cross-border phenomenon, such as it is now as Europe has experienced “the largest rise in selling prices recorded over the last 25 years.”

So for the Fed the challenge remains how best to combat inflation, its key job, without killing off the economy with higher interest rates, its other key job.

Get more trading strategies and investing insights from the contributors on Real Money.