The Federal Reserve returning to 50 basis points interest rate hikes would confuse the market and rattle the economy, according to Bob Michele, chief investment officer of JPMorgan Asset Management.
Yet Fed Chair Jerome Powell seemed to open the door to that prospect on Tuesday when he said the central bank may have to increase borrowing costs to levels higher than previously anticipated.
“If the unemployment data this week is very strong then you’ve got 50 basis points back on the table,” said Michele. “But that is a pretty high hurdle to get to once you’ve down-shifted to 25 basis points.”
Powell’s comments triggered a repricing of interest rate expectations that briefly placed the odds of a 50 basis point hike higher than those for a 25 basis point hike when the Fed next meets later this month.
“To go back to 50 would be pretty confusing to the market,” Michele said. “I hope they don’t do it. I hope they’re willing to run a string of 25 basis point increases.”
Tightening cycles typically end in recession a year after the final interest rate increase, according to data Michele cited that stretches back to 1981. He expects the Fed will pause interest rate increases once the upper limit of its range reaches 5.5%, implying 75 basis points of further tightening.
“I can understand the frustration for the Fed when you look at a lot of job gains, low unemployment, inflation prints that are sticky,” he said. “The Fed will go higher then they should pause and see what the cumulative lag looks like.”
This article was provided by Bloomberg News.