A 75 basis point hike? Here are 3 ways the Fed can sound more hawkish this week

The US Federal Reserve’s plan to raise interest rates to a neutral level of around 2.5% by the end of the year has come under pressure after surprisingly strong consumer inflation data in May.

“May’s CPI was a major blow to the Fed’s hopes that inflation is cooling anytime soon,” said Stephen Stanley, Amherst Pierpont’s chief economist.

Many economists believe that after the CPI data, Fed Chair Jerome Powell and his colleagues will look for ways to send hawkish signals to convince the public and markets that they are serious about containing inflation.

The Fed is due to announce its policy decision and release updated economic forecasts and a “dot plot” forecast of future interest rate path Wednesday at 2:00 p.m. ET. Powell will explain all of this at a press conference at the Fed’s headquarters in Washington at 2:30 p.m. Eastern time.

Here are three ways economists are saying the Fed can send more aggressive signals:

The size of Wednesday’s rate hike

For the past six weeks, Fed officials have rallied around a plan to raise the central bank’s interest rate by half a percentage point at both this week’s Fed meeting and the next meeting in late July.

Despite the hot CPI reading, most economists thought that was the most likely outcome for Wednesday until the Wall Street Journal published an article Monday afternoon saying Fed officials were considering restoring markets with a higher-than-expected 0 .75 percentage points to surprise. rate increase. Shortly after the article was published, a number of prominent economists, including Goldman Sachs and JP Morgan, revised their forecasts to include a 0.75 percentage point hike on Wednesday. Other economists are sticking to the increase of half a percentage point.

A 75 basis point hike would be the biggest rate hike in almost 30 years.

Economic forecasts are supposed to be a signal from the Fed to curb growth, even if this increases the risk of recession

The Fed last published its economic forecasts, including its forecast for interest rates, in March. That forecast is “largely planned,” noted Richard Moody, chief economist at Regions Financial Corp., because the Fed was forecasting “the softest of soft landings” — in other words, a rapid deceleration in inflation with no change in the unemployment rate.

In March, the Fed set a year-end median federal funds rate of 1.875%, ending 2023 at 2.75%, which was also the implied end-of-year interest rate.

That forecast will be different, economists said.

“We expect the FOMC to send an unequivocal signal that it intends to tighten monetary policy this year and next more than it anticipated at the March meeting. In fact, we’re looking for the dot-plot medians, which signal a tightening policy stance for both this year and 2023, even though that could mean we’re taking a higher risk of a recession,” said Oscar Munoz, macro strategist at TD Securities.

Regardless of the eventual magnitude of the June rate hike, the Fed will be close to 1.875% after the July meeting, raising the question of how much higher the median will be at the end of 2022 and how much interest rates will rise in 2023.

Economists at Deutsche Bank said the Fed’s economic forecasts should show a less soft landing but stop short of a recession.

They expect the Fed to raise its forecast for the unemployment rate in 2023 and 2024 and cut its estimate for gross domestic product.

On the key issue of inflation, Deutsche Bank forecast that the Fed will forecast an inflation rate of 5.6% as measured by the Personal Consumption Spending Index, followed by an inflation forecast of 3% for the fourth quarter of 2023 and then an inflation rate of 2 .3% in 2024.

Powell’s take on how much more tightening will be needed

In May, Powell said the Fed would not hesitate to push interest rates above neutral into restrictive territory. He’s likely to double that commitment this week.

Powell “will no doubt sound even more aggressive at his Wednesday press conference, which he has any time this year,” said Ed Yardeni, president of Yardeni Research Inc.

“On one hand, Powell will likely argue that the Fed cannot increase food and energy supplies to bring prices down. In fact, he will admit that the Fed’s only tool for fighting inflation is to raise interest rates to levels that depress demand for all goods and services, even if that increases the risk of a recession,” Yardeni said.

The yield of the 10-year Treasury note TMUBMUSD10Y,
reached its highest level since April 2011 on Monday.

shares DJIA,

fell sharply on expectations of a hawkish Fed. A 75 basis point hike? Here are 3 ways the Fed can sound more hawkish this week

Brian Lowry

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