Fed to aggressively raise rates to crush high inflation: Expert

ANKARA

The US Federal Reserve is set to aggressively raise interest rates in order to crush record-high inflation, according to an expert on Tuesday.

"Inflation and inflation expectations are up beyond any bounds," Mark Zandi, chief economist at Moody's Analytics, told Anadolu Agency via email.

"The Federal Reserve has gone on high alert. It sees the US economy growing strongly and closing in on full employment, while the Russian invasion pushes up prices of oil and other commodities," he added.

Annual consumer inflation in the US rose 8.5% in March, marking the largest 12-month increase since December 1981, according to the US Department of Labor.

The energy index rose 11% in March following a 3.5% gain in February, while the gasoline index jumped 18.3% after gaining 6.6% in February.

The Fed increased interest rates by 25 basis points on March 16, but the central bank’s officials later signaled that they could bump rates by 50 basis points.

The probability of a 50-basis-point hike stood at 99.8% on Monday, according to the FedWatch Tool provided by US-based global markets company Chicago Mercantile Exchange (CME) Group.

However, higher Fed rates also means slowing the American economy down, which is already struggling to recover from the coronavirus pandemic.

"Higher interest rates work to slow the economy’s growth and ultimately ease inflation through multiple channels. The most notable is via the highly rate-sensitive housing and mortgage markets," Zandi said.

He said it is expected that the Fed's federal funds rate would be near 2.5% by this time next year.

Zandi also noted that a higher 10-year Treasury yield is pushing up mortgage rates.

"The central bank will start to trim from its portfolio the $5 trillion in Treasury and mortgage backed securities it purchased during the pandemic through last month," he said.

"Home sales will be another casualty of the higher mortgage rates," he warned.