Fed Battles Raging Inflation with Interest Rate Fire Hose; Volatility on the Rise
What the Fed thought in mid-2021 was an isolated inflation dumpster fire has grown into a raging inferno fueled by continuing global supply chain issues, the tragic war in Ukraine and spiking commodity prices.
Responding in its economic smokejumper role, the Fed has dramatically changed its outlook on using interest rate increases as its preferred tool to douse inflation, according to Kiran Kini, CoBank senior vice president and treasurer.
“At the end of last year, the Fed indicated they would raise rates two or maybe three times in 2022,” said Kini. “Now, they’re guiding us to at least seven rate increases this year as a base case, with the first increase—25 basis points—having already occurred on March 16.
“The Fed also is indicating that it will front-load its rate increases, which means there is a high likelihood of back-to-back 50-basis-point increases in May and June (the Federal Open Market Committee, which sets rates, does not meet in April). Again, that appears to be the base case. And the Fed seems to be guiding toward announcing a balance sheet runoff in May, as well. That would remove a significant buyer from the market as they reduce the pace of reinvestments and let their balance sheet begin to run off.”
Kini says the war in Ukraine has caused commodity and food prices to increase, which has further exaggerated inflationary pressures. He added that the uncertainty around a resolution in Ukraine and the ability of rate increases to actually tame inflation are likely to create significant market volatility.