Federal Reserve Chair Jerome Powell, who’s carefully telegraphed interest rate hikes over four years, looks likely to abandon gradualism and move more forcefully to stamp out inflation along with growing concerns that it will persist.
The Federal Open Market Committee is expected to raise rates 75 basis points by Wall Street firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc, who cite rising inflation expectations among Americans in looking for the largest increase in nearly three decades. Citigroup Inc. and Bank of America Corp. economists are among those who still think the Fed will shift by 50 basis points as previously planned.
The Fed will announce a decision and publish fresh forecasts at 2 p.m. Wednesday in Washington. Powell will hold a press conference 30 minutes later.
“The usual rule is, if you are worried about how your moves are going to affect financial markets, you move gingerly,” said Barclays senior economist Jonathan Millar, among the first to call for 75 basis points. “You worry about the risk of breaking something. In this case, it’s worth breaking something. We are at a very critical point where it looks like their credibility is starting to erode.”
Powell last month said the Fed wasn’t actively considering a 75 basis-point move, while not ruling it out if conditions changed. While the Fed chief laid out a baseline of 50 basis-point increases in June and July, he also hedged by saying that hinged on the economy evolving as officials expected.
On Friday, data showed the consumer price index increased 8.6% in the 12 months through May, the most in 40 years and defying predictions that inflation had already peaked. The Fed has a goal of 2% inflation, based on a separate measure -- the personal consumption expenditures price index, which was running at 6.3% in April.
Even more concerning for central bankers was the University of Michigan’s sentiment survey showing respondents expecting prices to advance 3.3% annually over the next five to 10 years, the most since 2008 and up from 3% in May.
“The FOMC will raise federal fund rates by 75 bps at its June meeting,” said Anna Wong, Bloomberg’s chief U.S. economist. “One or more dovish members of the committee may well dissent. Given surprisingly elevated inflation readings in recent months, Powell will argue that a supersized move is needed to preempt inflation expectations from unanchoring.”
Both Barclays and Jefferies, who were among the first to change their Fed calls, cited the Michigan survey as key evidence that inflation expectations could be starting to become unglued, with Jefferies calling it a “game changer.”
Market Pricing
“The goal of the Fed is for inflation not to become entrenched,” said Diane Swonk, chief economist at Grant Thornton LLP. “People’s behaviors are changing. It will be that much harder to derail later on. You can’t make the mistake of the 1970s. You have to deal with bringing demand down in a supply-constrained world, as painful as that may be.”
Markets started pricing in a 75 basis-point move following the New York Fed’s survey on Monday showing US consumers expect prices to rise even faster over the next year, as well as reports from the Wall Street Journal and other news outlets including Bloomberg News on the likelihood of such a move.
The central bank typically moves deliberately, trying to avoid excess volatility such as 2013’s taper tantrum, when Treasury yields surged suddenly under then-Fed Chair Ben Bernanke.