The Fed is expected to hike rates by three-quarters of a point this week
Markets are starting to price in an even faster pace of interest rate hikes, and Federal Reserve officials are apparently considering that possibility as well.
Central bank policymakers are considering the idea of a 75 basis point increase in the Fed’s benchmark funds rate that banks charge each other for overnight funding, according to CNBC’s Steve Liesman.
“My report is that a 75 basis point rate hike will be announced on the second day of this week’s meeting, is very likely, a distinct real possibility,” Liesman said. “I know Powell said the committee in May wasn’t actively considering it, but he also said they were looking at the economy, and I think the economy has changed to the point in my report, at this point , I’d be dialing in at 75 if I was a bettor at this point, not 50.”
A Wall Street Journal article published Monday afternoon reported the central bank’s change in stance for the first time. The federal funds rate affects many consumer products based on adjustable rates, such as mortgages and credit cards.
In recent days, traders in the interest rate futures market have increased their bets that the Fed will go beyond its traditional 25 basis point hike pattern.
Recent jumps in bond yields underscored the possibility of a more aggressive Fed at the end of the Federal Open Market Committee’s two-day meeting on Wednesday.
The 10-year Treasury yield climbed to 3.37% on Monday, a rise of 21 basis points, while the 2-year yield, which mostly tracks Fed intentions closely, accelerated to 3.34% , a jump of nearly 30 basis points. A basis point is one hundredth of a percentage point.
The Fed is using interest rate hikes as a way to reduce demand, which has generated levels of inflation reaching over 40-year highs. Markets expect the central bank to continue raising rates at least until the end of the year as it attempts to bring inflation closer to its 2% target.
The Journal report did not cite any specific sources for its reporting, but said officials may reconsider their stance on rates in light of several recent reports showing that inflation is not only historically high, but continues to push. on the rise. The Fed is in its quiet period ahead of the two-day Open Market Committee meeting that opens Tuesday, so officials cannot comment on policy.
Friday’s Consumer Price Index report showed that headline inflation in May rose to an 8.6% pace. A separate New York Fed survey released on Monday showed one-year inflation expectations at 6.6%, tied for a record high in a data series dating back to 2012.
The roots of inflation are multiple: clogged supply chains are driving up prices, while energy prices are rising due to a drop in production, a situation made worse by the Russian attack on the Ukraine. A mismatch between supply and demand in the labor market also fuels much higher wages, which in turn drive price increases.