Expectation of 75 bps rate rise is high
- The U.S. Federal Reserve could discuss lifting the federal funds rates by 75 basis points (bps) at the two-day meeting of the Federal Open Market Committee starting on Tuesday. If confirmed, the larger-than-expected increase would be the largest since 1994 and bring the target range of the rates to 1.5%-1.75%. The market previously foresaw a 0.5% rate hike instead.
- The Fed has raised the rates in two consecutive meetings this year, ending the era of near-zero interest rates that lasted for two years since the COVID pandemic. Below is the change in the target fed funds rates this year:
- Jan. 26, 2022 0%-0.25%
- Mar. 16, 2022 0.25%-0.50% (+25 bps)
- May 4, 2022 0.75%-1.00% (+50 bps)
- Despite the rises, economists including former Fed official Richard Clarida warned that the pace was still insufficient to combat the inflation. Former Treasury Secretary Larry Summers warned that the Fed was “much too optimistic” about the inflation and a recession is “more likely than not” for the U.S.
- At the same time, the world is facing the risk of years-long stagflation, according to World Bank President David Malpass. The lender lately downgraded its estimate for this year’s global economic growth to 2.9%, a significant reduction from the prediction of 4.1% made in January and 3.2% in April.
China, New Zealand Foreign Ministers meet online
- China respects the traditional bonds between New Zealand and the Pacific island countries, Chinese Foreign Minister Wang Yi stressed at a virtual meeting (China’s readout: Ch/En) with New Zealand Foreign Minister Nanaia Mahuta. Wang also said China would like to have more multi-party cooperation in the region with New Zealand.
- The talks on Monday came a week after Wang finished his trip to South Pacific island countries. Although Wang denied any intention of geopolitical competition, the trip and China’s earlier security agreement with the Solomon Islands panicked the U.S. and its Indo-Pacific allies. U.S. President Joe Biden and New Zealand Prime Minister Jacinda Ardern reacted with a hawkish joint statement.
- However, Mahuta takes a more practical stance over China’s recent move, saying New Zealand does “not need to be reactive to any other agenda from any other country.” By talking with Mahuta, Wang appeared to show friendliness toward New Zealand and remind the country of their common interests in trade and climate issues.
- The proximity and strong trade complementarity breed close economic relations between the two countries. China is the largest trading partner of New Zealand, and New Zealand is the first developed country that has signed a Free Trade Agreement with China. However, such economic ties failed to secure a solid political bond.