The Fed is likely to consider a 0.75 point rate hike this week

series of Alarming inflation reports In recent days, Fed officials are likely to be led to consider surprise markets with a larger-than-expected 0.75 percentage point increase in interest rates at their meeting this week.

Before officials began their first lull on June 4, they signaled they were ready to raise interest rates by half a percentage point this week and again at their July meeting. But they also said that their outlook depends on the development of the economy as they expected. Inflation report last week The Labor Department showed a bigger jump in prices in May than officials had expected.

Two consumer surveys also showed that household expectations for future inflation have increased in recent days. This data could worry Federal Reserve officials because they believe that such forecasts can be self-fulfilling.

The Fed raised interest rates by half a percentage point in Its meeting last month, the first increase since 2000, to range between 0.75% and 1%. The Federal Reserve raised interest rates by 0.75 percentage points at its 1994 meeting, when the central bank was raising interest rates rapidly to anticipate a possible rise in inflation.

Fed Chairman Jerome Powell avoided surprising markets on the day of policy meetings, instead arguing that the central bank could achieve its goals of tightening policy by shaping market expectations.

But he also said in an interview last month that the Fed will be guided by upcoming economic data. What we need to see is clear and convincing evidence that inflation pressures are easing and inflation is declining. “If we don’t see that, we’re going to have to think about moving more aggressively,” Powell said.

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in Press Conference Last month, Powell said the central bank would “struggle to avoid adding uncertainty” but also acknowledged the possibility of “other surprises” in the inflation data. “So we will need to be smart in responding to incoming data and evolving forecasts,” he said.

The Labor Department reported Friday that its consumer price index rose 8.6% in May compared to the same month a year ago, pushing inflation to a 40-year high. This was a setback for forecasters who were looking for signs that inflation had peaked in March. Rising fuel prices and supply chain disruptions from Russia’s war against Ukraine have driven prices up in recent months.

A handful of Wall Street forecasters, including investment banks

Barclays

And Jefferies, said Friday, after the release of inflation data, that they expect the Federal Reserve to raise interest rates by 0.75 percentage points this week.

Rising oil costs helped push the national average price of a gallon of gasoline to $5 for the first time, adding to inflation pressures throughout the US economy. Image caption: Todd Johnson

“We believe risk management considerations require robust action to enhance the Fed’s anti-inflation credibility,” Barclays economists wrote in a later report on Monday. While such a move “would interfere with communications leading to a blackout,” the report said, “risks of protracted inflation have intensified,” justifying the rate hike further.

After this article was published on Monday afternoon, other forecasters, including in

c. B. Morgan Chase

& Co. And the

Goldman Sachs Group a company ,

They said they expect the interest rate to rise by 0.75 percentage point this week.

On Friday, a University of Michigan survey of consumers’ long-term inflation expectations rose to the highest level since 2008. On Monday, the New York Federal Reserve reported that its survey showed consumers’ short-term inflation expectations had jumped and that the distribution of household long-term expectations was more Diversified than in the past, indicating that more households may expect higher inflation to remain, although the average has not risen.

Fed officials said they would like to respond aggressively to signs that inflation expectations are rising, or becoming “unstable,” because they believe the process of extracting inflation from the economy will become more difficult if that happens.

“It’s one or two hits,” said Diane Sonk, chief economist at Grant Thornton. “They have to go now with a score of 75. The Fed is behind the curve, and they know it.”

Bond yields, which jumped on Friday amid a broad market sell-off, continued to climb as the trend deepened on Monday. Investors in the interest rate futures markets put a probability of around 30% on the larger increase of 0.75 percentage point on Monday afternoon, up from about 4% before inflation reports last Friday.

Officials will have to consider several considerations in their two-day meeting, which begins on Tuesday. They can stick to their current strategy of raising rates in half a percentage point increments indefinitely until they see signs that inflation is definitely heading lower.

Such a path to raising rates would raise the Fed’s benchmark rate overnight to a range of 2.25% to 2.5% by September, and to a range of 3.25% to 3.5% by December. This would mark the most severe period of policy tightening since the 1980s.

Alternatively, Powell and his colleagues could signal an increased likelihood of a shift to larger rate hikes at the Federal Reserve’s meeting in late July.

But if officials anticipate a high probability of such an increase at the July 26-27 meeting, they may decide to move more aggressively this week.

Ms. Sonk said she expected officials to make such an argument at this week’s meeting. “The data now is not good. The data suggests they have to do more,” Ms. Sonk said. “We are moving into a world that is more prone to inflation, and they know that, and if they don’t hold it back now, it could be incredibly corrosive.”

Already, the borrowing costs that markets have set are rising faster than the Federal Reserve’s benchmark interest rate in anticipation of its policy moves. Mortgage lenders said Monday that they have begun quoting a 30-year fixed loan at rates above 6%, levels not reached since 2008.

Other analysts said Monday afternoon that a larger 0.75 point rate jump would cause more problems for the central bank than it might solve by confusing investors about how the Fed will respond to the new data.

“It opens up additional communication challenges after that,” said Neil Dutta, an economist with research firm Renaissance Macro. It indicates that the Fed is losing confidence in its forecasts. We all know they were trying to catch up, but now they seem to be in a panic.”

Mr. Dutta said he is also concerned that a significant increase in interest rates will make it difficult for the central bank to avoid a recession. He said, “It indicates that the Federal Reserve is ready to push the economy into a ‘hard landing’ scenario to control inflation.”

write to Nick Timiraos at [email protected]

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