Jakarta, CNBC Indonesia – Inflation data released by the United States (US) on Thursday (12/1/2022) tonight has become the top concern since the beginning of the year. Understandably, rising price data can be an indicator that determines US central bank (Fed) interest rates.
Reuters poll results show it is based on inflation Consumer price index (CPI) December 2022 expected at 6.5% Year after year (y/y), much lower than the previous month’s 7.1% (y/y).
If the data is released as expected, of course it will be good news, the chances for the Fed to ease the rate of interest rate hikes will be even greater. However, if inflation falls only slightly, or stagnates and even rises, then obviously it will be a disaster.
Naturally, the financial sector was the first to be hit by the disaster, then it spread to the real sector which drove the world economy into a deeper recession.
Market participants now expect the Fed to ease its interest rate hike after the US services sector contracted in December for the first time in two-and-a-half years. This sector contributes no less than 70% of the gross domestic product (GDP) of the United States.
According to the CME Group’s FedWatch toolkit, the market now sees the Fed raise interest rates by 25 basis points each in February and March, peaking at 4.75% – 5%.
The probability of a 25 basis point hike in February is 75% and 65.9% in March.
With US economic data already showing signs of a slowdown, market participants see an opportunity for the Fed to cut interest rates faster.
The FedWatch tool shows that interest rates could be cut at the end of 2023.
This is certainly different from the projections provided by the Fed last December. The world’s most powerful central bank previously indicated it would hike interest rates two more times, 50 basis points in February and 25 basis points a month ago, to 5% – 5.25%.
The Fed also previously said interest rates would not be cut until 2024.
The scenario market participants want could happen if inflation continues to fall this year and starts tonight. However, the scenario will get even worse if inflation rises. The Fed is likely to hike interest rates even higher than its December projection.
“Restoring price stability when inflation is high requires efforts that may not be popular in the foreseeable future because they can slow down the economy,” he added, Powell said, in his Riskbank Conference speech quoted by CNBC International Tuesday (10/1/2022).
The statement implied the Fed’s commitment to reduce inflation, even as it had to continue to raise interest rates and drive the economy into a recession.
JPMorgan CEO Jamie Dimon said the Fed may need to raise interest rates by up to 6% to fight inflation. That interest rate would be the highest since 2001
In an interview with Fox Business Tuesday (10/1) morning New York time, Dimon said the central bank should raise interest rates to 5% and then take a break. He said the pause was meant to allow bankers and economists to see how the economy is reacting and whether inflation can come down.
“Inflation is not going to come down as people expect,” he said. “But it will definitely go down a bit.”
If conditions still don’t improve, Dimon believes the Fed could start raising interest rates in the fourth quarter and calls the rate hike “a 6% possibility.”
The higher the interest rate, the meaning it will be a disaster for the world stock market. The US dollar will strengthen again and the rupee risks falling again. US bond yields (Treasuries) will rise again, which risks triggering new capital outflows from the government bond market (SBN).
If the Fed raises interest rates to 6%, Bank Indonesia (BI) will obviously follow suit. The current BI interest rate is 5.5%, the difference with the Fed is about 1.25%. If the BI maintains this difference, the BI interest rate could subsequently reach 7.25%, if the Fed’s interest rate reaches 6%.
BI’s high benchmark rate will certainly raise lending rates. The public will be burdened, for example, home loan interest rates (KPR) may be higher. Business expansion will also stagnate due to the high level of credit for working capital and investment, as a result the Indonesian economy will slow down further.
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