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Fed to raise rates by 1% in next 3 months, says ABN AMRO

Kitco News

(Kitco News) With the Federal Reserve sending more aggressive signals, ABN AMRO is pricing in two 50-basis-point rate hikes at the next two monetary policy meetings.

"We now expect 50bp hikes in May and June," said ABN AMRO's senior U.S. economist Bill Diviney.

The Dutch bank pointed to Fed Chair Jerome Powell's hawkish comments around the "obvious need to move expeditiously" and "nothing" stopping the Fed from employing the 50bps rate hikes if they were judged as necessary.

"[These are] clear signals to us that the Committee is actively considering larger tightening steps than we previously thought," Diviney said.

And now, with the U.S. stock market staging a recovery this week, the Fed could feel more confident in its decision to step up tightening.

"The fact that market sentiment has continued to recover (also on the back of increased optimism over the Russia-Ukraine conflict) has in our view given the Fed a green light to go ahead with this more aggressive approach to tightening monetary policy," Diviney explained.

However, ABN AMRO doesn't see this aggressive pace lasting past the June meeting. Diviney is projecting a more gradual pace of 25-basis-point rate hikes at each of the FOMC meetings until the Fed's key rate is at 2.5-2.75%, which will happen in early 2023.

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For this scenario to play out, inflation will have to show some signs of cooling. "If this does not happen, the Fed could well judge that it needs to continue tightening policy at this faster pace," Diviney added.

Also, the Fed is not likely to raise rates much higher than 2.5-2.75% because of concerns around slower economic growth and the idea that monetary policy takes time to filter through the system.

"While the surge in energy prices following the outbreak of the Russia-Ukraine conflict could push inflation expectations even higher, this risk must be weighed against the significant growth dampening effects higher energy prices are having," Diviney wrote. "[And] monetary policy works with a significant lag – up to 18-24 months."

All the Fed-related attention will now turn to the release of the FOMC meeting minutes from March, which will be published in one week.

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