The Federal Reserve System (FRS) may have to drop its forecasts for the second time in a row on the rate of increase in the base interest rate due to the continuing rise in inflation in the United States.
Judging by futures on the rate level, traders estimate the probability of its rise by 100 basis points (bp) at once at the July 26-27 meeting from the current level of 1.5-1.75% at 85%, according to Market Watch. Prior to the publication of US inflation data for June, the market estimated this probability at about 3%.
Up 100 bp would be the largest since the early 1990s, notes Bloomberg.
In June, the Fed raised the rate by 75 bp. for the first time since 1994, although before the meeting the leaders of the US Central Bank spoke about plans to increase it by only 50 bp. Fed Chairman Jerome Powell then said that in July the rate would be raised by another 50-75 bp, and Fed leaders who spoke after the June meeting spoke out in support of this plan.
However, data from the US Department of Labor, published on July 13, showed a further increase in inflation in the United States, in connection with which experts started talking about the high probability of another increase in the Fed’s rate hike in July.
Consumer prices (CPI index) in the US last month rose by 9.1% in annual terms. Thus, inflation accelerated from 8.6% in May and reached a new maximum in almost 41 years (since November 1981). Economists believe that after the publication of these data, the Fed will have to raise rates by at least 75 bp.
„The Fed is making a mistake by tying its own hands by saying it intends to raise rates by no more than 25, 50 or 75 bps,” said Kirkoswald hedge fund analyst Dayana Amoah, quoted by the Financial Times. „From the stats, you need to keep a free rein to be able to go the way the data points. Right now, they show the Fed is only at the beginning of its fight against high inflation.”
According to Amoah, a 100 bp rate hike in July will be right for the Fed.
The futures market for the base interest rate expects the US Central Bank to raise it to 3.7% by January 2023.
Atlanta Federal Reserve Bank (FRB) President Rafael Bostic said on Wednesday that „any decision” on the rate could be made at the July meeting, given the acceleration in inflation. At the same time, the head of the Cleveland Fed, Loretta Mester, made it clear that she is not yet sure of the need to raise the rate by 100 bp at once, despite the „absolutely bad” inflation data.
„We don’t have to make a decision today, there will be other data that I will rely on to make a decision,” Mester said in an interview with Bloomberg.
Morgan Stanley economist Julian Reachers notes that the bank’s base case remains a 0.75 bp rate hike by the Fed. this month as long-term inflation expectations remain close to the Fed’s 2% target. However, the risk of rising inflationary expectations is serious enough to push the Fed’s leadership to at least discuss a sharper than 75 bp rate hike.