Case 3 – Federal Reserve Monetary Policy
US rate futures price in 50-basis-point Fed rate hike after Powell
testimony
Traders of futures tied to the Federal Reserve’s policy rate have priced
in a 50-basis-point hike in interest rates at the US central bank’s Mar
21-22 policy meeting after Fed Chair Jerome Powell said on Tuesday
(Mar 7) that continued strong inflation data could require tougher
measures.
The price of fed funds futures contracts fell, pointing to a 66 per cent
probability that the central bank will lift its benchmark overnight interest
rate to the 5.00-5.25 per cent range on Mar 22, from the current 4.50-
4.75 per cent range, according to the CME Group’s FedWatch tool. That
was up from the 30 per cent chance seen before Powell’s testimony
before the Senate Banking Committee. The futures contracts pricing
also points to firming expectations for the policy rate to rise to a 5.25-
5.50 per cent range by June. The peak funds rate is seen hitting 5.6 per
cent in September.
With the next policy meeting two weeks away, Friday’s US employment
report for February along with an inflation report next week will be
crucial in determining the pace of upcoming rate increases. Powell’s
testimony on Tuesday marked a stark acknowledgement that a
“disinflationary process” he spoke of repeatedly in a Feb 1 news
conference may not be so smooth.
Source: Adapted and edited from CNA, 8 Mar 2023
i. Identify the phase of the business cycle for USA during Year 2023.
Support your answers with actual data.
ii. Discuss whether expansionary or contractionary monetary policy
was undertaken by the Federal Reserve in 2023, and explain ONE
(1) monetary policy tool that the Federal Reserve can use to
address the economic situation.
iii. Explain how the interest rate increases by Federal Reserve would
affect USA consumption and investment. Include clearly-labelled
consumption function diagram and investment demand diagram to
support your explanation.