Federal Reserve May Increase Interest Rates

The world’s attention is on the US Federal Reserve’s two-day policy meeting that began on Tuesday. Experts, globally, agree that the US Fed will increase interest rates, and the focus is on the magnitude of the hike. In the run-up to the meeting, there has been a host of key economic data that can help gauge how hawkish the US central bank will be.

The recent higher-than-expected Consumer Price Index print has raised the prospect of a more aggressive monetary policy tightening. Markets now expect the terminal fed funds rate to be 4.25 percent and are even assigning a 20 percent chance of a 100 basis point hike, with a minimum 75 bps hike pencilled in.

The Fed hiked its policy rate by three-quarters of a percentage point at both its June and July meetings. Since March, it has lifted that rate from near zero to the current 2.25-2.50 percent target range.

The reaction across global indices has been swift. Since mid-August, the Nikkei has dropped 4.5 percent, the Nasdaq 12.5 percent while the S&P500 saw 10 percent of its value erode.

Even as inflation dominates, the Fed’s policy cornerstone is employment. The recent data of new jobless claims showed that the jobs market remains tight. US jobless claims dropped for the fifth straight week suggesting demand for workers remains healthy.

Retail sales were slightly better than expected, a relief on the demand front. University of Michigan consumer sentiment reading for September eased fears that the Fed may raise interest rates by a full percentage point. A breather on the inflation side was the drop in producer price index for the second straight month.

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