The latest jumps in consumer prices and inflation expectations will probably spur Federal Reserve officials to consider the biggest interest-rate increase since 1994 when they meet this week, after Chair Jerome Powell previously signaled a smaller move was the likely outcome.
US central bankers conclude a two-day meeting on Wednesday, with a decision due at 2 p.m. in Washington. Powell indicated at his post-meeting press conference in early May that the Fed would move forward with half-point rate hikes in June and July as long as economic data came in as expected. It was an unusually precise steer by the Fed chair.
But 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. Those bets hardened on Monday afternoon following a report in the Wall Street Journal suggesting the larger move was now in play.
Stocks extended a selloff Tuesday morning in Asia after sinking into a bear market alongside a surge in bond yields. Market participants continued to digest growing expectations of sharper Fed hikes with MSCI Inc.’s Asia-Pacific share index falling over 1.5% and bourses in Japan, China and Hong Kong among those in the red. US futures steadied in the wake of a three-day rout in the S&P 500 of nearly 9%.Wall Street
Economists at major Wall Street firms were quick to change their calls. Goldman Sachs Group Inc. and Nomura Holdings Inc. both shifted on Monday to forecast 75 basis point hikes this week and at the Fed’s meeting in late July. JPMorgan Chase & Co. also went to 75 basis points at this week’s meeting, joining Barclays Plc and Jefferies, who modified their calls Friday to the bigger increase.
Powell and his colleagues, facing harsh criticism for being slow to remove emergency pandemic stimulus and allowing inflation to climb by the fastest pace in 40 years, have repeatedly said they would do whatever it takes to cool prices.
While the Fed chief laid out a baseline of 50 basis-point increases in June and July, he also hedged by saying that that hinged on the economy evolving along the lines that officials expect.
On Friday morning, data showed the consumer price index rose 8.6% in May from a year earlier, a fresh 40-year high. The figures topped all estimates and underscored a broad-based advance, a sign that price pressures are becoming entrenched in the economy.
Later in the morning, University of Michigan data showed US consumer sentiment in early June dropped to the lowest on record. Respondents also said they expect inflation of 3.3% over the next five to 10 years, the most since 2008 and up from 3% in May.
That’s especially concerning for the Fed, which had been taking comfort in the fact that longer-term inflation expectations have held steady. Any de-anchoring of expectations risks price pressures becoming further embedded in the economy, as consumers anticipating higher prices will also demand higher wages. And if companies are paying employees more, they will have to charge higher prices, perpetuating the cycle.