Zerodha's Nikhil Kamath questions US Fed's interest rate hike

Zerodha CIO Nikhil Kamath says that the US Fed's interest rate increase may not be enough, even though it is the largest increase since 1994.

Zerodha's Nikhil Kamath questions US Fed's interest rate hike

Thursday June 16, 2022,

2 min Read

Zerodha CIO and co-founder Nikhil Kamath has spoken against the US Federal Reserve's decision to increase interest rates by 75 basis points to around 1.6 percent.

Kamath believes that the rate is still far too low to reign in an inflation rate that has already reached 7 percent for the first half of the year.

Earlier this week, the US Fed approved a 75 basis point increase in the federal funds rate, the highest single jump in interest rates since 1994. However, the current rate of under 1.75 percent is still historically low, and reports suggest there will be more rate hikes in the coming months, with expectations of at least 3.4 percent by the end of the year.

According to Kamath, when considering the growing inflation and home mortgage rates of six percent, the current interest rate is far too low to genuinely curb inflation in the next few months. He said in a tweet,

"Why will a fed rate of 1.6 percent with inflation at 8 percent contain inflation?"

Governments the world over are grappling with the triple threat of a supply chain crisis caused by COVID-19, a food supply crisis caused by the Russian invasion of Ukraine, and rising inflation, and are responding with interest rates bumps that are causing further volatility in the stock market.

The logic behind these moves is that a higher interest rate will incentivise individuals and corporations to invest more of their money rather than spend it, thereby reducing demand in the market and bringing down inflation. However, if governments and central banks don't get their interest rate rises correct, it could lead to the unfortunate event of flagging economic growth and high unemployment rates simultaneously.

Edited by Megha Reddy