US CPI may raise interest rates

An economist said the US CPI, inflation data and a weak peso could lead to sharper increases in domestic policy rates.

Michael Rycafort, chief economist at Rizal Commercial Banking Corp, made the statement to The Manila Times after the US CPI for August 2022 yielded an 8.3% year-over-year return.

“This data became one of the biggest catalysts in global financial markets that led the US central bank (the Federal Reserve) to start raising mega/big +0.75 interest rates each on June 15, 2022 and July 27, 2022,” said Rycafort.

The Fed is also expected to discuss raising interest rates when the Federal Open Market Committee meets later on September 20.

Ricafort said some Fed officials also cautioned against any prior easing of the federal funds rate and monetary policy.

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“The Fed’s monetary policy stance/interest rate hikes may continue to be a function of US CPI/actual inflation data,” he said.

Rycafort reported that US stock markets posted their biggest daily drop in nearly two years as aggressive Fed rate hikes could increase borrowing and financing costs.

He added that the current US CPI data will increase the risks of a recession in the US, which will subsequently affect the sales, income and overall valuations of some listed companies.

Rycafort said the US dollar “corrected” higher against major global currencies overnight as the Federal Reserve increased interest rates.

He explained that this correction will lead to a decrease in the high US consumer price index, and inflation will continue to support the US dollar against the major global currencies in terms of widening interest rate differentials and higher interest rate income in favor of the US currency compared to other countries.

“[This] This has been the case since the Fed began signaling the start of a Fed rate hike in June 2021, and the actual start of a Fed rate hike in March 2022, from the record low of 0 to 0.25 percent before March 2022, to the current 2.25. percent to 2.50 percent,” said Rycafort.

He added that some Fed officials have indicated the need for it to rise to 4 per cent levels in order to “reduce US CPI/inflation significantly” from the current high levels.

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