Fed rate hike: Another big rate hike seen as Fed begins 2-day meet

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Washington: US central bankers opened their two-day policy meeting Tuesday amid a blistering inflation surge that has ignited predictions the Federal Reserve will approve the biggest interest rate hike in more than 27 years.

Fed Chair Jerome Powell has signaled that policymakers were poised to implement another half-point increase in the benchmark borrowing rate this week and another next month.

But a growing number of voices are now calling for a more aggressive three-quarter point hike in response to the big, unexpected jump in the consumer price index in May, which defied widespread expectations the data would show inflation pressures easing.

A Fed spokesperson confirmed the meeting of the policy-setting Federal Open Market Committee began as scheduled at 1500 GMT. Markets will get the rate decision on Wednesday at 1800 GMT.

Officials will debate how high to raise borrowing costs amid surging prices and fears of a bout of 1970s-style stagflation if their efforts to cool the economy clamp down on growth as well.

After dropping the rate to zero since March 2020 in a successful bid to help the world’s largest economy avoid a devastating downturn and recover quickly from the impact of the Covid-19 pandemic, the Fed has raised rates twice, including a big, half-point increase last month.

Low lending rates and the boost from massive federal stimulus caused demand to outstrip supply amid global supply chain snarls, pushing prices higher, and the Russian invasion of Ukraine added more fuel to the inflation fires, sending food and fuel prices soaring.

– Credibility boost or negative surprise? – Economists thought March was the peak of CPI, but the rate spiked in May, jumping 8.6 percent in the latest 12 months.

“Given the latest information on inflation, we believe that risk-management considerations call for aggressive action to reinforce the Fed’s inflation-fighting credibility,” Barclays analysts said in a commentary.

If policymakers decide on a giant step, it would be the first 75-basis-point increase since November 1994.

But other analysts say the massive step would be unnecessary and could be viewed as panicky, and instead project an additional half-point hike in September.

“With supply improving and demand for goods falling relative to services, margins will compress and inflation will fall much faster than markets and the Fed expect,” Ian Shepherdson of Pantheon Macroeconomics said in an analysis.

He noted that many of the factors driving the price spikes are “outside the Fed’s control, like oil prices.”

The consensus remains for policymakers to stick to the plan, and central bankers are typically loath to surprise markets, although they insist their decisions are “data dependent” and will adjust to evolving situations.

Karl Haeling of LBBW said markets are pricing in at least one 75-basis-point increase in the next three meetings, but chances of that happening this week are “50-50.”

“We believe they will probably avoid raising by 75 bps to reduce risk of an even bigger stock market plunge. But the coming barrage of Fed officials giving public comments after Wednesday will probably suggest that 75 bps is certainly possible at July’s FOMC,” he said.

Barclays said despite the element of surprise, “an aggressive move in June would provide the committee with the biggest bang for its buck, sending a resounding signal of the Fed’s resolve to guide inflation back to its 2 percent target.”

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