(Bloomberg) — May’s red-hot inflation bolstered expectations that the Federal Reserve will keep raising interest rates in half-point steps through September, and there’s talk of an even bigger move in the conversation.
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Investors increased their bets on a 75 basis point hike after data on Friday showed consumer price growth accelerated to a new 40-year high, though Fed watchers are generally doubtful that the President Jerome Powell take that step next week.
“Even in these fast-moving times, the Fed is likely to be reluctant to surprise markets, reducing the chance of a 75 basis point surprise at next week’s meeting,” said Sarah House, senior economist. of Wells Fargo & Co. “However, we could see Chairman Powell at the post-meeting press conference indicate more clearly that 75 basis point increases are on the table for future meetings if we don’t see a decline in inflation.”
Powell will hold a news conference after the conclusion of the Fed’s two-day meeting on Wednesday. He has already put half-point moves on the table for this month and next and said officials will keep pushing until they see “clear and convincing” evidence that prices are cooling.
There was little sign of that in Friday’s data. The consumer price index rose 8.6% from a year earlier in a broad-based advance. The core CPI, which excludes the more volatile food and energy components, rose 0.6% from a month earlier and 6% from a year earlier, also above forecasts.
Powell’s Fed has been careful to telegraph policy changes well in advance. While he rejected a 75 basis point hike at the May meeting after his St. Louis Fed colleague James Bullard said it might be worth considering, Powell hasn’t taken anything off the table permanently and has emphasized the need for policy to be nimble. .
The desire to avoid ambushing the markets pushed against a large move next week. Still, economists at Barclays Plc and Jefferies changed their forecasts after May’s CPI release to an imminent 75 basis point rise.
“The US central bank now has good reason to surprise markets by rising more aggressively than expected in June,” Barclays economists led by Jonathan Millar wrote in a note on Friday. “We realize that it is a closed decision and that it could take place in June or July. But we are changing our forecast to call for a 75 basis point increase on June 15.”
The last time the Fed raised rates by that amount was under then-Chairman Alan Greenspan in 1994.
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“With the next CPI report likely following roughly the same monthly pace, the chance of a new spike in year-over-year inflation is high. That will likely keep the Fed on a path of 50 basis point hikes beyond July, even if the economy is cooling.
— Anna Wong and Andrew Husby (economists)
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The bad news about inflation continued to mount. The University of Michigan’s flash confidence index for June slumped as rising prices hit American households with respondents expecting prices to rise 3.3% over the next five to 10 years, the biggest amount since 2008 and an increase of 3% in May.
Americans are furious about higher prices, caused by supply chain tangles from the pandemic, rising energy costs due to the war in Ukraine, and too much stimulus from fiscal and monetary policy . Powell, who acknowledged that the Fed underestimated inflation and could have started adjusting it sooner, can expect strong challenges later this month when he testifies before Congress.
“If these high monthly numbers continue, increases of 50 basis points beyond July will be much more likely. And I wouldn’t rule out increases of 75 basis points either,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “Powell said they were not under active consideration in May, but could well be considered in the future. if inflation shows no signs of abating.
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