“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses,” the British economist Lionel Robbins wrote in 1932.
Put simply: Every choice comes with tradeoffs that might not be so savory.
It’s the position the Federal Reserve finds itself in as the U.S. central bank’s monetary-policy committee prepares to convene next week. The dilemma here is whether to fight inflation, risking the possibility that doing so triggers a recession, or to tolerate higher prices and keep the momentum going. Making a choice is easier said than done, with the ongoing Russia-Ukraine war raising the specter of stagflation – a combination of low growth and high inflation.
Observers say Fed Chair Jerome Powell and his colleagues will kick-start the tightening process with an interest-rate hike of 25 basis points (0.25 percentage point) next week while also signaling that they will push hard against inflation for the rest of the year. As always, they are expected to preserve their flexibility to adjust the pace if needed.
“Barring a very sudden tightening of financial conditions, as per February/March 2020, the Fed sticks to plan A, i.e., hike rates by 25 basis points next week,” Marc Ostwald, chief economist and global strategist at London-based ADM Investor Services International (ADMISI), said in an email.
“I think the Fed is very much going to echo the European Central Bank in trying to offer an element of predictability in what are very uncertain circumstances, while retaining optionality and flexibility,” Ostwald added.
Futures contracts on Fed funds imply a 25 basis point rate hike is already baked in to the market; it would be the first rate increase since December 2018. Two years ago, the central bank cut rates close to zero and launched an open-ended, liquidity-boosting, asset-purchasing program to counter the adverse economic effects of the coronavirus pandemic.
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Fed fund futures (CME’s FedWatch tool)
Fed’s dot plot to signal more rate hikes
Traders will look to Powell and the Fed statements for clues on how fast rates might rise in the coming…
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