On Monday, that risk popped up again in a survey from the New York Fed, which showed one-year ahead median inflation expectations climbed in May to 6.6%, tying the highest reading since the survey began in June 2013. However, three-year ahead projections held steady at 3.9%.
Tactically, a 75 basis-point increase would be a communication shift for Powell who has preferred to telegraph moves in advance 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 though boost credibility by showing the Fed’s serious about its inflation fight. But it also risks confusing markets about what they do next if investors know officials are willing to switch guidance.
“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.
June’s meeting includes fresh forecasts for rate over the next couple of years. Recently, though, those forecasts have rapidly become obsolete as new data has rolled in.
--With assistance from Michelle Jamrisko and Andreea Papuc.
This article was provided by Bloomberg News.