How Much Rate Rise Would Combat Inflation Successfully?

Investors expressed concern that the Fed was not strongly combating inflation a few months ago. After several significant rate increases, some increasingly worry that tightening the Fed’s monetary policy may cause the economy to enter a recession.

Interest rate futures gave the Fed a 20 percent chance of raising rates by 100 bps on a September date. When the market asked whether the move would be 50 or 75 bps earlier this month, those numbers seemed impossible. With the current US federal funds rate closing at 4.4%, investors are expecting significant rate hikes going forward.

Is the Fed Moving Too Fast?

At the start of the year, investors criticized Fed trades for being too slow. However, many are concerned that the current sharp rate hikes could make it harder for policymakers to measure the economic impact of tightening, making them more likely to raise rates too high.

Jeffrey Sherman is afraid of over-tightening and the bad landing scenario. According to him, the Fed has over-tightened and produced harsh landings more frequently than they have not. Despite the 225 bps of tightening that the Fed has already implemented, figures from the US suggest that the economy looks to be chugging along.

The WB has warned that even a “modest impact” may cause the economy to enter a recession. At the same time, FedEx (NYSE: FDX), a transportation giant, recently reported a severe profit deficit that it blamed on sluggish growth.

Jeffrey Gundlach, the CEO of DoubleLine, expressed concern over a potential rate rises to CNBC last week after criticizing the Fed for moving too slowly in June. The largest hedge fund in the world’s history, Bridgewater Associates, was founded by Ray Dalio. He recently stated on Linkedin that a hike in interest rates to 4.5% might cause a 20% decline in stock prices. The main policy rate set by the Fed is 2.25 – 2.5 percent.