FED LIFTS INTEREST RATE BY 75 BASIS POINTS

On 15 June, the U.S. Federal Reserve raised its benchmark interest rate by three-quarters of a point, the largest such increase since 1994.

The Fed also indicated that it will continue to raise rates at every meeting this year in its attempt to quell inflation, which set a 40-year record pace of 8.6 percent in May.

All members of the central bank’s policy-setting committee expect the rate to reach 3 percent by year’s end. Half think it might need to be as high as 3.375 percent by then according to reports.

Fed officials see the bank’s key interest rate rising to 3.75 percent by the end of next year, boosting their projection from 2.75 percent, which they set in March.

The bank’s campaign of rate increases is its most aggressive since the early 1980s, when inflation ran in double digits.

“It is not going to be easy” to slow or reverse inflation while keeping the economy humming, Fed Head Jerome “Inflation is Temporary” Powell admitted in a press briefing after the meeting.

“There’s a much bigger chance now that [achieving a so-called ‘soft landing’] will depend on factors that we don’t control,” he added. “Fluctuations and spikes in commodity prices could wind up taking that option out of our hands.”

The Standard & Poor’s 500 index enjoyed a brief moment of optimism on news of the rate increase, rising 1.5 percent before resuming its slide the next day. Bond prices rallied.

The central bank will raise rates to levels that should rein back inflation, Powell added.

“We think that policy is going to need to be restrictive,” he said, “and we don’t know how restrictive.”

Still, Powell said he sees no signs of a broad economic slowdown and “overall spending is very strong,” he pointed out.

TREND FORECAST: The future economic conditions will greatly deteriorate as central banks raise interest rates. 

Covering up their inaccuracy over the past year-and-a-half that inflation was “temporary” and then “transitory” the Fed committee removed a line from its guidance statement that, in May, had said inflation would drop to 2 percent and the labor market will remain strong as the bank continues to hike interest rates.

During his press conference, Fed Head Powell blurted out that “overall spending is very strong.” However, that was a totally false statement since the U.S. Commerce Department reported that consumer spending in May actually slipped 0.3 percent from April. And that “slip” did not account for inflation, which spiked to 8.6 percent. Thus, consumers spent a lot more to get a lot less. 

The higher interest rates rise, the higher mortgage rates increase. While a 30-year fixed-rate mortgage was barely above 3 percent in December, last week rates hit above 6 percent. Therefore, as we detail above, the housing market will continue its decline.

Also, the higher interest rates rise, the heavier the public and private debt burden. On the public’s side, we maintain our forecast for a sharp downward dive in the commercial office space sector as more people work from home and their employers support the move since they can save a lot of money by renting less office space. There will also be sharp declines in malls and big city commercial real estate that heavily rely on commuters and tourists.