US Fed to Hike Funds Rate 75 Basis Points
The Federal Open Market Committee is expected to raise the federal funds rate by another 75 basis points at its meeting this week and continue to emphasize its commitment to bringing inflation down to near its 2% target. The FOMC’s statement following Wednesday’s meeting is due for release, with Chairman Jerome Powell’s press conference.
Leading up to the June meeting, FOMC officials had been hinting at a 50-basis point increase but became concerned by a larger-than-expected jump in current consumer prices and heightened inflation expectations in the week before the meeting and shifted to a larger 75-basis point increase.
Since then, FOMC officials have expressed the sentiment that larger rate increases could be needed as inflation is running hotter than expected. This has some market participants concerned that the FOMC could provide another upside surprise with a 100-basis point increase at this week’s meeting.
However, analysts expect the FOMC will opt to stay the course with a 75-basis point increase at this week’s meeting and use the post-meeting statement to emphasize its inflation concerns. The June CPI data released on July 13 was stronger than expected again, but the preliminary monthly survey from the University of Michigan published on July 15 showed that inflation expectations had eased from June.
“We expect the statement will note risks to the economic outlook, particularly around inflation, and we also see the statement continuing to emphasize that ongoing increases in the federal funds rate will likely be appropriate,” Morgan Stanley said in a July 18 research note, expecting an acknowledgement from the FOMC of a slowdown in spending growth but also the continued tightness in the labour markets.
There will be no update to the Summary of Economic Projections at this meeting. Fed Chairman Jerome Powell’s post-meeting press conference will be parsed for hints on monetary policy, but Powell is expected to walk a fine line between the risks of being overly aggressive in tightening policy and conversely not acting fast enough to bring down inflation expectations.
“On forward guidance, we expect [Powell] may provide some additional guidance about what to expect beyond this summer, likely in some form of conditional guidance noting that if monthly inflation continues to run at the same pace, then it may be appropriate to continue interest rate increases at the same magnitude; if monthly inflation convincingly begins to slow over a series of readings, it may be appropriate to slow the pace of hikes; and if upside risks emerge, it may be appropriate to speed up,” Morgan Stanley said.
If the FOMC opts for a 75-basis point increase, it would put the federal funds rate range at 2.25% to 2.5%, right on the long-term neutral rate and just 100 basis points below the 3.5% expected level at the end of 2022 that was seen in the last SEP.
With three meetings remaining in 2022, the FOMC would need to either adjust the 3.5% target or begin to slow the pace of tightening, particularly as an acceleration in the balance sheet runoff program starting in September will act as a tightening measure as well. # US Fed to Hike Funds Rate 75 Basis Points
