Just a month ago, Federal Reserve Chairman Jerome Powell said the central bank was not “actively considering” raising interest rates by 0.75 percentage point to fight inflation.
But after Friday’s consumer price index report showed inflation rising faster than expected, Wall Street is worried that Powell may have to change his tune.
Stocks fell on Friday and fell sharply again on Monday around the world. The benchmark 10-year US Treasury yield rose to 3.27%, the highest level since November 2018.
Investors are nervous that the Fed may be entering uncharted territory. A three-quarter percentage point increase would certainly show that the US Federal Reserve is really concerned about inflation.
But a move of this magnitude, while not unprecedented, is extremely rare. The last time the Fed raised rates by 75 basis points was in the Alan Greenspan era in November 1994.
To be sure, the market still has some doubts that the Fed will be as aggressive at this Wednesday’s meeting. According to federal funds futures listed on the CME, traders are pricing in a 60% chance that the central bank will raise rates by just half a point.
But expectations for a three-quarter-point increase have risen from just 3% a week ago to 40% now.
Barclays economists think the Fed will announce a three-quarter-point increase on Wednesday “to bolster credibility and anticipate inflationary pressures. The broader game plan will likely be to raise rates as quickly as possible.”
Jefferies economists have also now joined the 75 basis point camp, saying in a report over the weekend that “inflation is not peaking, not even stabilizing. It is still accelerating and will likely do so again in June.”
Jefferies economists added that while “the Fed hates to surprise the market, the sharp rise in inflation expectations” is “an escape valve and gives Powell a way out.”
“In light of recent developments, no one will criticize the Fed for raising [três quartos de por cento]”, added the Jefferies economists.
Therefore, investors probably shouldn’t completely rule out the possibility of a three-quarter-point increase as early as Wednesday. And if that doesn’t happen then, the “one” could be coming at the next Fed meeting in July.
In fact, Fed fund futures on CME are now pricing in a more than 50% chance of a three-quarter point increase next month and a more than 25% chance the Fed will raise rates by one percentage point. complete.
Would that be an extreme move? Sure, but investors seem to realize that when Powell (and other Fed insiders) repeatedly say that the Fed’s decisions are “data dependent,” they really mean what they say.
Well guess what? Inflation data still stinks. That’s why even a full point increase soon can’t be completely ruled out.
Source: CNN Brasil
