The Federal Reserve is expected to escalate its battle to tame hyperinflation on Wednesday with its first 75 basis point interest rate hike in nearly three decades, a move that threatens to slow US economic growth and exacerbate financial pressure on Americans.
With inflation unexpectedly accelerating to a 40-year high in May, the Fed is under mounting pressure to act more aggressively to cool demand and slow the rise in consumer prices.
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Central bank policymakers raised the benchmark interest rate by half a percentage point – twice the typical size – in May, and laid out a roadmap for increases of similar size at their June-July meetings, assuming the data developed as expected. But a string of worrying inflation reports in recent weeks may force the Fed to change course.
a A grim report from the Ministry of Labor Last week showed that the Consumer Price Index rose 8.6% in May from last year, faster than expected. It represents the fastest pace of inflation since December 1981 and undermines economists’ hopes that rising consumer prices are fading. Another poll released on Monday showed that households are preparing for a significant increase in prices – a worrying sign because Fed officials believe such forecasts can be complete.
“Based on movements within price markets, rapidly changing inflation expectations and a shaky investor class, we now expect the Federal Reserve to raise its policy rate by 75 basis points at its June meeting,” said Joe Brusolas, chief economist at RSM. “Continuing increases in inflation have precipitated turmoil in financial markets and caused a significant tightening of US financial conditions.”
The Fed has not agreed to a 75 basis point rate hike since 1994, underscoring how bad the inflation crisis is.
president Jerome Powell has so far avoided panicking the markets With sudden moves, he previously rejected the possibility of a 75 basis point hike. But that was before the April and May inflation reports came out much hotter than expected, reviving the possibility of a previously unimaginable 75 basis point increase. Powell also pledged that any steps the Fed takes will be guided by recent economic data.
“What we need to see is clear and convincing evidence that inflation pressures are easing and inflation is declining,” Powell said last month. “And if we don’t see that, we’ll have to think about moving more aggressively.”
Many economists believe that the Fed is acting too late to quell inflation, with the Fed’s benchmark interest rate in a range of just 0.75% to 1.0%. Barclays, Goldman Sachs and Jefferies now forecast a 75 basis point rise this week, which could put the range at 1.5% to 1.75%.
Wall Street is also bracing for a series of sharp interest rate hikes, with 90% of traders beginning to gain 75 basis points on Wednesday, according to CMEGroup’s FedWatch tool, which tracks trading. The prospect of a large-volume interest rate hike rocked markets this week, perpetuating a global sell-off that sent the S&P 500 index back into bear market territory amid concerns that the Federal Reserve may inadvertently trigger a recession.
Although policymakers are counting on finding that elusive sweet spot – known as a soft landing – history shows that the US central bank often struggles with the successful thread between tightening policy and maintaining economic growth. Higher interest rates tend to create higher personal and business loans, which slows the economy by forcing employers to cut back on spending.
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“The Fed’s job is getting harder by the day with inflation hitting a new 40-year high, along with broader weakness in the economy,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence and a former advisor to the Dallas Federal Reserve. The Federal Reserve Tightens Policy in a Recession.