The mega 75% rate hike announced by US FED last night (15th June 2020) was the biggest in nearly 30 years. But not surprising, given the imminent need to tame inflation, which is rising at its fastest pace in 40 years in the US.
The puzzling question still lingers on, how much is enough to cool spiraling prices?
What we need to understand is that this is NOT a DEMAND lead inflation (when demand rises drastically jacking up the prices), BUT, Supply Disruption led inflation (when Supply gets hampered.)
If Russia- Ukraine come to an agreement, or the current escalation in war slows down, Oil prices will crash immediately, bringing the much-needed relief to the global economy, off course Oil producing nations who are partying now, will not like it.
Alternatively, if OPEC (read Saudi) agrees to increase production of Oil, which it has not despite repeated pleas from US, UK & rest of the world, it will cool down oil prices. Mind you Russia is part of OPEC+, and the largest partner, and they would want to see Oil prices higher coz it happens to be their Cash Cow.
In 2020, during COVID lockdowns, when Oil prices went negative, technically Oil producer were ready to pay, if someone took Oil delivery that time and stores it. Then OPEC+ (Which Includes Russia) went ahead to cut production by 10 Million barrels Per day (Consider Global Oil consumption to be around 100 Million Barrel a day), this production cut was never brought back to Pre Covid levels and OPEC+ Still supplies 2.5 Million barrel lesser to the World, When demand is peaking beyond pre-covid levels.
If US inflation remains sticky, FED rate hike is likely to continue through the year, with another 50 bps or 75 bps hike in July, targeting forecast of the Fed Funds rate touching 3.4% by this year end (2022), there could be 50 bps rate hikes in each of the four Fed meetings this year,
While policymakers seem confident that the US economy is well-positioned to deal with higher interest rates, much of the inflation is fanned mainly by high energy and commodity prices due to supply constraints precipitated by the Russia-Ukraine war, about which no central bank has any control.
