The Federal Reserve will probably have to inflict much more pain on the economy to get inflation under control.
Growth is already slowing in response to the Fed’s repeated interest rate increases, with the housing market softening, technology companies curbing hiring and unemployment claims edging up.
The consumer price index (CPI), a gauge of inflation, jumped 9.1 percent in June from a year earlier – the largest gain since 1981. All eyes are now on the Federal Reserve as it meets on Tuesday to discuss monetary policy.
Following its meeting next week, the Fed is expected to raise interest rates by three-quarters of a point. But will it be enough to ease price pressures?
According to a recent Pew Research Center survey, three-quarters of Americans say they are “very concerned” about the rising prices. The cost of energy has jumped 41.6 percent in the last year while groceries increased by 12.2 percent.
Officials at the US Federal Reserve have indicated that the central bank would likely raise rates by 75 basis points at its July 26-27 meeting.
Inflation reports have remained elevated, and that’s led just about all market prognosticators to expect at least a 75 basis points hike from the Federal Reserve.
A 100 basis points hike was briefly on the table, and Fed Funds future prices suggest a ~20% chance of that still happening, but reports suggest that the Fed won’t go quite that far.
The FOMC statement and Fed Chair Powell’s press conference will be in some ways more needle moving for the market, as the market tries to size the possibility of a recession and how committed the Fed will be to taming inflation if that recession shows up.
With talk already of rate cuts coming next year, the phrase ‘threading the needle’ is sure to come up a few times this week.
They expect the Federal Open Market Committee to lift rates by a half percentage point in September, then shift to quarter-point hikes at the remaining two meetings of the year.
That would lift the upper range of the central bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.
Swap traders betting on Fed policy are now leaning toward a 50 basis-point hike in September as more likely than a 75 basis-point move, following weak US economic data earlier on Friday.
The broader path envisioned by economists is slightly more hawkish than the one implied by market pricing.
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