A recent report revealed that overheating inflation is increasing pressure on the Federal Reserve to take drastic measures to control prices.
In statements reported by “Bloomberg”, James Pollard, President of Bank Federal Reserve in St. LouisIt has become “significantly” more hawkish and now supports a full percentage point rate hike by July 1.
Given that there will only be 3 Fed meetings before that time, that means the Fed will have to raise rates by half a percentage point in one meeting, rather than the typical moves of about a quarter of a percentage point. The Federal Reserve has not raised interest rates by half a point since 2000, that is, in 22 years.
At the moment, investors are seeing the Fed’s 50bp hike in March as a near 100% certainty.
The turnaround comes after a new report showed that consumer prices rose 7.5% in January, the fastest gain in 12 months since 1982. And not only that, inflation accelerated unexpectedly on a monthly basis.
In a recent research note, Alexander Lin, the US economist at Bank of America, said: “The risks are increasing for a 50 basis point rate hike.”
But none of this is consistent with the stock market. The Dow Jones index fell 425 points, or 1.2%, last Thursday’s trading, hitting its lowest level in the session.
At the same time, the fact that investors, Fed officials and Wall Street banks are even considering such a violent rate hike is certain. Just a few months ago, the debate was over whether the Fed would raise interest rates two or three times this year. Now, there is a growing feeling that March alone will be a double-digit rally.
Peter Bokfar, chief investment officer at Bleakley Advisory Group, says it would be “strange” for consumer prices to rise 7.5% and for the Fed’s initial response to be just a small rate hike.
Bank of America has been calling for 7 rate hikes this year, indicating a move of about a quarter point at each meeting starting next March. But after the latest inflation report, the US central bank analysts indicated that a more aggressive step may be needed to tackle inflation.
The Fed wants to avoid raising interest rates so aggressively that it scares investors who are now accustomed to very low rates. “The Fed does not want to surprise the markets,” Bank of America said.