3 thoughts on current interest rate hikes

Today, I would like to record my thoughts on the current interest rate hike that is coming from the US Fed. The central bank raised its interest rate by 25 basis points on the first of February, and my reflection would centre around its February hike.?

I am not a professional economist, so I don't have any intention to forecast the market move or the economic situation. Since I have personal interest on this topic, I want to record my thoughts now for future reflections.?

Without further ado, let's get started.?

1. Market may be jubilant too soon

After the recent hike on February 1st, I noticed that the capital market became jubilant. It seemed to believe in the idea that the Fed may not raise its interest rate further, and it may also reduce its rate within this year.?

Such an expectation comes from the Fed chairman's recent press conference mentioning disinflation. The rate of inflation indeed decreased from nine-something percent to six-something percent recently.

The market seems to miss a key point that the Fed would maintain its trajectory of interest rate hike for sometime. The Fed aims to kill inflation for sure, so that it also wants to maintain its interest rate for some time.?

The Fed may reduce its interest rate within this year since it wants its rate to become constrictive. The Fed has been consistent in communicating its goal of reducing the inflation by 2 percent.

Though the rate of inflation recently dropped due to energy prices, it may not be possible to see an outright reduction of inflation from now. There may be some factors that would keep the strength of inflation at the current level for a year or two.?

I would explain what they are in the next paragraphs.?

2. Supply chain shock

The supply chain shock is one factor that would give fuels to inflation to maintain its current level. Regardless of what the Fed does on its interest rate, they may not be able to solve the issue of supply chain disruption.

The disruption happened since the outbreak of COVID-19 as governments shut down their economies to stop the spread of the virus. During those lockdowns, factories in China shutdown, and some ports experienced a bottleneck for years.?

As the supply bottleneck emerged from the COVID-19, the price of goods began to rise even during the summer of 2021. The current inflation trend was already beginning during the year 2021, and it became worse with the outbreak of the War in Ukraine.?

The war disrupted the food supply chain as the two combatants were major bread baskets for the global grain supply. The price of food increased in both advanced and developing economies so that some countries suffer from intense hunger.?

I would argue that the supply chain disruption won't recover soon, but it may be worse from the status quo. The war between Taiwan and China might become imminent, and if a war breaks out in the Taiwan strait, it will disrupt the supply of goods further.?

The war may destroy production capacities in the region due to the bombardment or shutdown. Since the amount of produced goods would decrease, their price level would either stay the same or become higher than the current level.?

So, the inflation may not calm itself down soon due to the Fed's posture on interest rate. Geopolitics would have a key to taming down the inflation that we see today.?

3. Job market?

The Fed chairman recently mentioned that the job market is quite strong after the January job number came out. The situation of the job market might be another reason why the Fed would keep their interest rate high.?

If the job market is hot, it would generate a concern that wage level would increase thereby increasing the price of goods and services. If the labour costs increase, the companies may try to pass the burden to the consumer by increasing their prices.?

Such a trend would trigger the price increase in the economy, which would sustain the rate of inflation higher than 2 percent target. If the hot job market keeps the inflation high, the Fed would try to increase its rate so that it can induce unemployment.

Right now, the US job market is in the state of complete employment with its unemployment rate less than four percent. At the same time, large corporations are starting to cut down their headcounts to preserve cash for their continuous operation.?

If the layoff trend is getting into smaller medium- and small-sized companies, it may cause a high number of unemployment in the economy. If enough people lose their job, they would further cut down their spending, thereby reducing the demand of the economy.

When the demand level decreases till the level of supply that we experience due to the supply chain shock, the price level might decrease. It would be the point when the world would see a large decrease in the inflation rate.?

Such an approach is problematic for ordinary people since they will lose their jobs and prosperity during the process. Many companies would have to lay off their workers since they are short on cash, and these people may not get their new job when the recession comes.

I fear that the Fed would continue raising and maintaining its high interest rate to get the inflation under control. I would have to see whether my article today has some grain of salt.?

4. Wrap-up?

These are my current thoughts on inflation and the central bank's interest rate hikes. The market seems to be discarding the Fed's will to raise and maintain its rates high to get the inflation under control.

It will be a serious mistake to enter into the capital market for an investment since I don't see that the market would rise. The market may suffer its massive downside pressure so that people would lose money if they enter right now.?

I would see whether my thoughts had some grain of salt and had some predictive ability for the future. Right now, I want to be cautious and maintain my cash position as much as possible.?

I hope you enjoyed my article today, and if so, please put your thumb up and share it with others that may also like it. Thank you, and I will see you in my next article.