US Fed rate hikes expected to eventually help ease inflation, say analysts
Already, some prices in the US, like those of houses and gasoline, are starting to come down, one expert told CNA's Asia First.
SINGAPORE: The United States (US) Federal Reserve’s latest move to jack up interest rates in a bid to tame surging inflation will eventually achieve its intended effect, said analysts.
The 0.75 percentage point increase by the US central bank on Wednesday (Nov 2) takes the benchmark lending rate to 3.75 to 4 per cent, but the rate is likely to reach a peak of above 5 per cent, analysts added.
The higher benchmark is harsher news for businesses that will have to deal with higher interest rates, and for households that will have to pay higher mortgage payments, credit card debt, car loans and higher borrowing costs across the board, said Dr Carl Weinberg, chief economist at High Frequency Economics.
But the higher borrowing costs will slow growth overall, and ease inflationary and price pressures, he told CNA’s Asia First on Thursday.
“Everything we know tells us that eventually, a slowing or contracting economy is going to lead to falling prices,” he said, citing the slowdown in 2020 amid the COVID-19 pandemic and the 2008 financial crisis.
“Pretty much every recession we've seen at least the pace (of) price increases slowing and most of them have seen actual decreases in prices.”
Already, some prices in the US, like those of houses and gasoline, are starting to come down, he said. The same trend can be seen in raw industrial materials like copper and aluminium.
However, food prices remain high due to the crunch caused by Russia’s invasion of Ukraine, Dr Weinberg noted.
“I think that we will see, eventually, the Fed will do its job - it will get prices to slow and the way that they do it, their instrument, is by causing the economy to slower, to contract, and I think that's the only possible outlook that we can have from where we are right now,” he said.
EFFECTS MAY TAKE MONTHS TO BE FELT
Market strategist with trading firm IG Asia, Yeap Jun Rong, told CNA938’s Money Mind that the effects of the latest tightening may take some months to filter through.
“For now, we are still seeing consistent outperformance in the inflation readings. So, it still suggests that the upside risk to the higher prices remains,” he said.
While headline inflation may have dipped, higher prices are seeping into other components, leading to concerns that inflation could be more ingrained, and may worsen and last longer, he added.
“Until we see further moderation, I think tightening will continue to be the path to go,” said Mr Yeap.
He noted that the Fed is looking at a policy lag effect, so “some hints of a slowdown are clearly in place”.
He added that Fed chair Jerome Powell shifted the focus away from a dovish stance, saying that inflation is the driving force behind the central bank’s policies.
Mr Yeap noted that the two more consumer price index reports that will be released by the end of this year will determine what comes next.