Per the futures market pricing and Overnight Index Swap (OIS) prices, the Federal Reserve will hike interest rates by 75 bps later until this week’s end.
It appears there is a growing belief in the market that maybe the Fed has increased interest rates sufficiently from the beginning to achieve its goal of containing inflation which has become quite concerning.
The frequently referenced precedent of the Fed in the early 1980s would imply differently, despite the fact that Janet Yellen, the US Treasury Secretary downplayed the possibility of a recession the week before.
In order to put an end to exceptionally excessive inflation during that time, Paul Volker, the Chair of the Federal Reserve had the backing of the Carter and Reagan administrations. He achieved this by aggressively tightening monetary policy, and his strategies were quite effective.
Several central banks have an asymmetry bias built into their monetary policy approach as a result of this practice. This inclination accepts the possibility of the excessive inflation in a bid to encourage the most sustainable growth possible.
Two recessions had to be endured in order to successfully control inflation in the ’80s. Sans a recession, the Federal Reserve has never been able to reduce inflation by over 2%. In light of this mind, the Federal Reserve will have some tools to stimulate economic activity if rates rise sufficiently and that happens.
When examining Treasury yield, specifically in the 2 to 10-year portion of the curve, the market seems to realize this. On July 22, yields there decreased by 11 to 15 basis points (bps).
The US Dollar’s current weak state might end with the decline in Treasury yields. The US Dollar could, however, certainly benefit from a potential risk-off climate in this situation. This conundrum appears to be putting markets overall and the price of gold at a crossing point.