While many banks believe the Federal Reserve will hold off on a real rate hike on Wednesday, fearing what such an unexpected move could do to markets and the broader economy, some believe the central bank may have to -be surprised with an aggressive move in the wake of bad inflation news.
Investment banks Jefferies, Barclays, Goldman Sachs and JP Morgan have told clients in research notes in recent days that they now believe the Fed will raise the federal funds target rate range, now between 0, 75% and 1%, by three-quarters of a percentage point at Wednesday’s Federal Open Market Committee meeting. A move of this magnitude would be equivalent to the Fed’s two rate hikes this year, in March and May.
Friday’s report of the consumer price index’s 8.6% rise in May from a year earlier and the University of Michigan’s consumer sentiment survey showing expectations for Higher long-term inflation is a game-changer for the Fed and signals that the central bank needs to pick up the pace in its efforts to bring inflation down, Jefferies economists Thomas Simons and Aneta Markowska wrote in a note Friday.
“As forecasters, we are often reminded that the job is to predict what the Fed will do, rather than what it should do,” they wrote. “This time, we believe the data creates such a strong case for a bigger rate hike, that the Fed not only should, but will deliver a 75 basis point hike.”
“The only argument against a 75 basis point hike is that the Fed hates to surprise the market and deviate from forecasts,” the Jefferies economists added.
As hawkish as Fed officials have been over the past few weeks in asserting over and over again the need for aggressive action and historically large rate hikes, none have made the case for interest rate hikes. greater than half a percentage point.
That includes St. Louis Fed Chief James Bullard, one of the central bank’s most hawkish policymakers, who was ahead of the curve in calling for an aggressive change in monetary policy to combat the high inflation. He was even willing to flirt with calling for a 75 basis point hike in the spring, but for now he said the Fed’s likely 50 basis point hike path was a “good plan”. .