Federal Reserve officials can debate a historic rate increase of one percentage point in late July after what another scorching inflation report put pressure on the central bank to act.
“Everything is on the line,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday after US consumer prices rose 9.1 percent faster than expected. scheduled for the year to June. When asked if that included raising rates by a full percentage point, he replied: “It would mean everything”.
Investors are betting that it is more likely that the Fed raise interest rates by 100 basis points when it meets on July 26-27which would be the largest increase since the Fed began using overnight interest rates directly to conduct monetary policy in the early 1990s. Americans are furious about high prices and critics blame the Fed for its slow initial response.
Cleveland Fed President Loretta Mester speaking Wednesday night at a interview on Bloomberg Television, declined to say whether he favored a hike at the July meeting, noting that there were major data releases between now and then. But he said that “there was no reason” to raise rates by less than 75 basis points delivered by policymakers last month.
“What I take from the report, and it was uniformly bad, there was no good news in that report at all, is that inflation remains unacceptably high“, said. “We at the Federal Reserve have to be very deliberate and intentional to continue on this path of raising our interest rate until we get and see convincing evidence that inflation has turned around.”
San Francisco Fed Chief Mary Daly, speaking in a separate interview with the New York Times this Wednesday night, he said: “my most likely position is 0.75, due to the data I have seen”, adding that he expected the CPI number to be high: “I saw that data and thought: this is not good news. I didn’t expect good news”.
The Fed has turned aggressive against inflation, after being blamed for its initially slow response, roiling financial markets and raising the risk that its actions could tip the US economy into recession. So much Bostic and Mester opposed the idea of a trade-off between inflation and employmentarguing that they had to provide price stability, even if that harms the labor market.
What does Bloomberg Economics say?
“The The Fed is right to be concerned about the unraveling of inflation expectationsand this report raises the possibility of an even larger rate hike of 75 basis points in the future,” say economists Anna Wong and Andrew Husby.
Given the acceleration of monthly inflation, economists at Nomura Securities International now expect a full one percentage point increase in the benchmark rate from the Fed at the next policy meeting.
“The incoming data suggests that the Fed’s inflation problem has worsenedand we expect policymakers to react by accelerating the pace of rate hikes to bolster their credibility,” Nomura’s Aichi Amemiya, Robert Dent and Jacob Meyer said in a note.
Fed Chairman Jerome Powell told reporters last month after the central bank raised rates by 75 basis points, to a range of 1.5 percent to 1.75 percent, that a rise of 50 or 75 basis points in July was likely. Most of his colleagues have since echoed his line or endorsed the larger movement.
Fed Governor Christopher Waller is scheduled to speak on Thursday, while Bostic and his St. Louis colleague James Bullard have events on Friday. Thereafter, officials enter their pre-meeting blackout period.
A global adjustment is expected
Central banks around the world face unprecedented inflation, leading to historic rate hikes from Hungary to Pakistan . The Bank of Canada on Wednesday raised rates by a surprising percentage point complete amid fears that decades-high price pressures are taking hold.
Brett Ryan, senior US economist at Deutsche Bank AG, said it made sense to discount some risk from a bigger Fed movebut saw it as unlikely without explicit communication from the central bank.
“The falcons had to have accepted the guide from 50 to 75, with the understanding that if we were to get an upside print, 75 would be the number,” he said. “They have time to communicate if they want to get that message across.”
The US central bank has turned to an aggressive tightening policy to face the highest inflation in 40 years. Last month they raised rates by 75 basis points, the biggest increase since 1994, despite previously signaling they were on course for a smaller half-point move.
“We have to put 100 on the table for Julysaid Andrew Hollenhorst, Citigroup’s chief US economist. “Everyone should be pretty cautious about calling peak inflation; a few months ago the peak was supposed to be 8.3 percent.”
Fed officials have said they want to push policy into restrictive territory, at a range of 3.25 percent to 3.5 percent by the end of this year, according to the median projection of the quarterly economic projections published in June. Futures markets on Wednesday showed investors prices in an even larger range of 3.5 percent to 3.75 percent At the end of the year.
The Fed’s abrupt shift to a 75 basis point hike last month came after a preliminary survey showed that consumer expectations about future inflation were rising.
Subsequent updates to the data, which came after the Fed meeting, erased most of that rally, but preliminary figures for July, expected on Friday, can provide policy makers with more ammunition to increase the size of this month.
Las Inflation expectations are particularly worrying for Powell and his colleagueswho are trying to avoid a 1970s-style price spiral.
“After what happened in June, I don’t rule anything outsaid Stephen Stanley, chief economist at Amherst Pierpont Securities. “I had been thinking the Fed would slow to a 50 basis point per meeting pace starting in September, but if the next two monthly inflation numbers look anything like May and June, all bets are off.”