According to experts, the hot May consumer inflation report from the United States was a game-changer for the Federal Reserve, ensuring that the central bank will take a hawkish posture in its Wednesday policy decisions.
In an interview, Rob Dent, US senior economist at Nomura, stated, “Doves don’t exist on the committee right now.”
Consumer price inflation surged to a 1% gain in May, raising the annual rate of inflation to a 40-year high of 8.6%.
According to Michael Pearce, senior US economist at Capital Economics, “they don’t really have a choice” but to be hawkish.
“They can’t give any indication that they’re going to take a break.” They need to show that they’re willing to go to any length on the hawkish side,” MacroPolicy Perspectives president Julia Coronado concurred.
The Fed’s revised predictions of how high the policy interest rate will rise over the next 18 months will be the clearest indication of its hawkishness.
The Fed projected a 1.9 per cent interest rate at the end of 2022 and a 2.8 per cent rate at the end of 2023 in March.
Dent believes the Fed will lift its prediction to 2.87 per cent, up 100 basis points. The Fed will also imply that the benchmark rate will climb to 3.1 per cent “at least” in 2023, according to him.
That’s a constrictive zone, where rates are stifling economic progress.
Dent explained, “The main story we’re expecting is a steeper path and a higher terminal rate.”
To battle inflation, Deutsche Bank economists believe the Federal Reserve will eventually boost its benchmark rate to 4%. The Federal Reserve’s policy rate is currently between 0.75 and 1%.
Next Tuesday and Wednesday, Fed officials will meet. At 2:00 p.m., the central bankers will provide a policy statement as well as revised economic forecasts. At 2:30 p.m. Eastern, Federal Reserve Chairman Jerome Powell will give a press conference.
Economists expected the Fed to raise its benchmark rate by a half-percentage point next week and again at its July 28-29 meeting, despite the CPI figure on Friday. However, the topic of discussion was what the Fed would do at its September meeting.
Several economists now believe that a 75-basis-point change is possible.
Jonathan Millar, Barclays Investment Bank’s acting head U.S. economist, believes the Fed will surprise the markets with a 50 basis point rate hike next week.
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Millar said in an interview that “it appears they need to do something dramatic here” to bolster their credibility in fighting inflation.
The Federal Reserve will eventually raise its benchmark rate to 4%, according to Deutsche Bank economists, to combat inflation. The policy rate of the Federal Reserve is now between 0.75 and 1 per cent.
Officials from the Federal Reserve will meet on Tuesday and Wednesday next week. The central bankers will release a policy statement as well as revised economic estimates at 2:00 p.m. Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 p.m. Eastern.
Despite the CPI number on Friday, economists expected the Fed to raise its benchmark rate by a half-percentage point next week and again at its July 28-29 meeting. The topic of conversation, though, was what the Fed will do at its September meeting.
A 75-basis-point change, according to several economists, is now possible.
Jonathan Millar, acting head of US economics at Barclays Investment Bank, expects the Fed will surprise markets with a 50 basis point rate hike next week.