US interest rates are still set to rise due to strong economic conditions and inflation despite a surge in COVID-19 infections driven by the omicron variant, according to Moody’s Investors Service, which recently said strong consumer spending, tightening labour markets and high inflation indicate US monetary policy is currently ‘highly accommodative’ and interest rates are ‘deeply negative’.

“The backdrop of elevated inflation and a tight labour market strengthens the case for an earlier and faster normalisation of monetary policy,” Moody’s said in a new report.

“Indeed, notwithstanding the risks to growth posed by the omicron surge, the Fed is well placed to move to a neutral monetary stance starting in March 2022, and we now expect three US interest rate hikes this year, compared with our November expectation of none until 2023,” it was quoted as saying by US media reports.

US interest rates are still set to rise due to strong economic conditions and inflation despite a COVID-19 surge, according to Moody’s Investors Service, which recently said strong consumer spending, tightening labour markets and high inflation indicate US monetary policy is currently ‘highly accommodative’ and interest rates are ‘deeply negative’.

A recent shift in signals out of the Fed indicate ‘broad support’ for both a rate hike in March and a normalisation of its balance sheet soon after the rate increase cycle begins, Moody’s noted.

Moody’s continues to expect that gross domestic product will grow by 4.4 per cent this year after rising by 5.4 per cent in 2021.

“The surge in virus cases will no doubt dampen economic activity in pandemic-sensitive services industries in January but, as previous virus surges have shown, activity will rebound once the omicron wave begins to subside,” Moody’s said.

The report noted that latest epidemiological forecasts point to a peak in case counts by the end of the month, with hospitalizations and fatalities peaking in mid-February.

Inflation is expected to moderate this year, but Moody’s said there remains a good deal of uncertainty in inflation forecasts.

The rating agency expects the Fed to take a ‘measured approach’ to withdrawing stimulus and normalizing its balance sheet, given the elevated uncertainty in forecasts and a likely reluctance to move too quickly.

Fibre2Fashion News Desk (DS)