"The Fed is going to have to do more because it desperately needs to gain credibility."

Amid the escalating inflation, the Federal Reserve raised interest rates by 75 basis points to bring it into a range of 1.50%-1.75% annually. The movement, which was the largest since 1994, denotes the urgent need to curb the 41-year price increase and pulverizes the Democratic Party's electoral chances.

Far from being an exception, specialists believed that if the Fed really wants to lower inflation, it will have to adjust rates at the current trend or higher. Until last Friday, the day on which the CPI inflation for May was known (8.6% year-on-year), Jerome Powell had planned to raise rates by 50 points. After the concerning indicator, the central banker had to raise it a quarter of a point higher than he had estimated to attempt to curb inflation.

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The new forecasts now project that the Federal Reserve will need to keep the pace at tightening the monetary policy over the coming months. Experts believe that the rates of Federal Funds will be at 3.4% by year-end compared with the 1.9% as thought in March. Experts project it at 3.8% in 2023.

Diego Ferro is the president of M2M Capital Management, a New York investment fund. The executive, who worked for major Wall Street banks (Citibank, Goldman Sachs, Morgan Stanley, and Lehman Brothers) spoke with LPO about the impact of the Federal Reserve policy and the upcoming rate movements.

Will raising rates help the Federal Reserve curb inflation?

The Fed desperately needs to gain credibility because a good part of the inflationary problem has been magnified by their own measures for injecting liquidity. It seems to me that they are going to have to do more than they are doing.

So, should we expect the 75-point hikes to continue?

The Fed is trying to promote the feeling that they are solving the issue. They are being more aggressive because they are running behind. Depending on what the market expects during the next meetings, they are going to adjust that, and will need to face rate hikes as aggressively as they are currently facing, or even more aggressively than expected.

It is important to monitor the final rate that the market is looking at, which will give you how much higher there will be going forward. It is a necessary step, but the first of several. If the market expects seventy-five points, they may have to make it to 100 points. It will depend on what the market expects Powell to do.

Doesn't raising rates faster put the economy and the dreaded "stagflation" at risk?

In reality, we can say that the inflation is significant and that the economy is already shrinking. So, if we are no longer in the "stagflation" situation, we are clearly going in that direction amid the failing economy. By raising rates even higher, they might generate recession, but they would also lower inflation. I believe that the first has been met, in other words, the drop in economic activity levels, but the second remains to be seen.