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ICICI Securities Report
Headline U.S. inflation, using both the Personal Consumption Expenditures and Consumer Price Index gauges, reached 40-year highs in January 2022 (6.1% and 7.5% respectively) while core PCE inflation (the Federal Open Market Committee's preferred target) surged to 5.2%, the highest since April 1983.
The U.S. Federal Reserve needs to aggressively tighten monetary policy to contain the inflationary surge: U.S. M2 growth has averaged 18.7% YoY in March 2020-Jan-22, far faster than average U.S. M2 growth of 6.8% YoY in the 60 years prior to the pandemic.
Rolling back this extraordinary monetary accommodation will require six rate hikes this year of 25 bps each (and one of 12.5 bps) in our view, taking the Fed Funds rate to 1.75% by the end of 2022.
Another four rate hikes in 2023 should take the Fed Funds rate to 2.75%, thereby restoring a slightly-positive real policy rate in the U.S.
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