The latest pickups in consumer prices and inflation expectations are expected to spur US Federal Reserve officials to consider the biggest interest-rate increase since 1994 when they meet this week, after Fed Chair Jerome Powell previously signaled a smaller move was the likely outcome.
US central bankers are to conclude a two-day meeting today, with a decision due at 2pm in Washington.
Powell indicated at his post-meeting news conference early last month that the Fed would move forward with half-point rate hikes this month and next month as long as economic data came in as expected.
Photo: Reuters
However, in the past few days, inflation figures have surprised to the high side, pushing investors to increase bets on a 75 basis-point increase at this week’s meeting, pricing in interest-rate futures shows.
That sentiment rose on Monday following a report in the Wall Street Journal suggesting the larger move was now in play.
Stocks extended a selloff in Asia yesterday after sinking into a bear market alongside a surge in bond yields.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.45 percent in volatile trade, clawing back some of its earlier losses.
Australia’s benchmark S&P/ASX200 closed 3.55 percent lower, while Japan’s Nikkei was down 1.32 percent, having fallen as much as 2 percent earlier in the session.
Economists at major Wall Street firms were quick to change their calls.
Goldman Sachs Group Inc and Nomura Holdings Inc shifted on Monday to forecast 75 basis-point hikes this week and at the Fed’s meeting late next month.
JPMorgan Chase & Co also went to 75 basis points at this week’s meeting, joining Barclays PLC and Jefferies, who modified their calls on Friday to the larger increase.
Powell and his colleagues, facing criticism for being slow to remove emergency stimulus prompted by the COVID-19 pandemic and allowing inflation to climb by the fastest pace in 40 years, have repeatedly said that they would do whatever it takes to cool prices.
Tactically, a 75 basis-point increase would be a communication shift for Powell, who has preferred to telegraph moves and embrace gradualism. That strategy has allowed the Fed to lean in to tighter policy, but let markets price the risk of going faster or slower as the data rolled in.
A 75 basis-point increase could boost credibility by showing that the Fed is serious about inflation.
However, it also risks confusing markets about what they do next.
“Once the Fed starts moving in 75s, it would be hard to stop, and the combination of this and the Fed’s outcome-based approach to inflation feels like it could be a recipe for recession,” Evercore ISI’s Krishna Guha and Peter Williams wrote in a note to clients.
A 75 basis-point move could also erode Fed credibility by underscoring how poor the Fed’s forecasting has been in the post-pandemic recovery.
This week’s meeting includes fresh forecasts for rates over the next couple of years.
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