75 basis point hikes have been recently deployed in Europe and Canada, and markets expect the U.S. Federal Reserve to follow suit, causing Kristina Hooper, Invesco’s chief global market strategist, to invent a new expression.
“I’m happy to announce that I’ve coined a new expression, one that I think is appropriate for the times – at least the monetary policy times: ‘75 is the new 25.’ Basis points, that is,” Hooper wrote in a recent insight. “It seems like central banks are giving away jumbo rate hikes like they are candy.”
Hooper said she sees a few different problems with this approach. Most importantly, the impact of rate hikes takes time to show up in economic data, causing fear that any central bank that hikes rates in 75 basis point increments is turning monetary policy into an even more blunt instrument and runs the risk of overdoing it, she said.
Pushed by recent rhetoric from the Federal Reserve, markets have come to expect that the Fed is likely to hike rates by 75 basis points this month. This expectation persists despite inflation moderating and longer-term inflation expectations becoming better anchored.
“I believe the U.S. economy is still fundamentally sound, with unemployment at a very low level,” Hooper wrote. “However, the Fed has readily admitted that it will take time for the negative effects of tightening thus far to show up in the economy. For example, housing has only begun to show the initial effects of a major increase in mortgage rates.”
“While central banks think 75 is the new 25, I hope that mindset changes,” Hooper said. “Data dependency and adjustment will be critical in avoiding a hard landing, in my view. In other words, we may have already had enough ‘front loading’ from central banks, and it’s time to get back to 25 basis point rate hikes.”
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