The Federal Reserve is gearing up for another big interest rate increase to rein in the country’s historic inflation.
Following a two-day meeting this week, the Federal Open Market Committee is expected to raise rates by at least three-fourths of a percentage point, but there is a chance the officials will opt to conduct an even more aggressive hike.
Last month, the Fed hiked its interest rate target by a whopping three-fourths of a percentage point, the most hawkish move since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike was equivalent to three simultaneous rate increases.
Some economists who think the Fed is way behind the curve in upping the federal funds rate believe the central bank should conduct a full percentage point hike in order to push down inflation even more forcefully, although such an abrupt and aggressive move is unlikely.
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As the outcome of the meeting looms large, investors are now pegging the odds of a three-fourths point hike at just over 75% and pricing in about a 25% chance of a full percentage point hike, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
A full percentage point hike was seen as nearly inconceivable just a few months ago, but recent inflation reports have been more bruising than most economic forecasters had predicted. Inflation accelerated to an explosive 9.1% for the 12 months ending in June, the highest level in four decades, according to the recently released consumer price index report.
Additionally, inflation, as measured by producer wholesale prices, ticked up to a smoldering 11.3% for the year ending in June, according to a report from the Bureau of Labor Statistics, near the highest on record. The producer price index gauges the wholesale prices of goods, which are eventually passed down to consumers.
Immediately after the inflation reports, some Fed watchers began betting on the more aggressive 100 basis point hike, although those predictions have been muted a bit by public statements in support of 75 basis point hikes by Fed officials, including some known for their recent hawkishness in increasing the federal funds rate.
Fed Gov. Christopher Waller, speaking at an economic summit this month, said that while the red-hot June numbers are very troubling, overreacting could be perilous for the economy — a statement that has tamped down expectations of a full percentage point hike.
“A 75 basis point hike is huge,” Waller said. “Don’t think because you are not going 100, you are not doing your job.”
A Reuters survey of economists conducted this month showed broad confidence in a 75 basis point hike. A whopping 98 of the 102 queried predicted the Fed would hike rates by three-fourths of a percentage point following this week’s meeting, bringing the range to 2.25%-2.50%.
The likelihood of a recession would grow should the Fed conduct a 100 basis point hike, a nightmare scenario for President Joe Biden, whose party is facing an uphill battle to retain control of both the House and Senate.
Many economists contend that the odds of the economy dipping into a recession in the next year or so are about even and on the rise. A recent Bloomberg survey of economists found that the probability of a downturn in the next year is now nearly 50%, up from 30% last month.
U.S. GDP decreased by 1.6% in the first quarter after a year of explosive growth. On Thursday, the Bureau of Labor Statistics will release initial numbers on whether the economy grew or contracted in the second quarter.
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Many economists view two consecutive quarters of negative growth to be recessionary, although declaring that the economy is in a recession is much more complicated, involving several different variables.
This week, the International Monetary Fund also revised down U.S. growth for this year to 2.3% and just 1% next year.
