Nomura predicts historic 100-basis-point Fed rate hike after heated inflation data

According to analysts at Nomura Holdings, the Federal Reserve may approve a historic, full percentage point interest rate hike when officials meet next week’s expected August inflation data after warmer inflation data.

“As a result of the upside risk of inflation, the Fed is likely to raise rates by 100 bp at the September FOMC meeting, up from our previous forecast of 75 bp,” Nomura said in an analyst note.

This would be the first rate hike of its size since the Fed began announcing overnight federal funds rate moves in 1994 and would keep the benchmark range between 3.25% and 3.50%, the highest since the 2008 financial crisis. .

Investors lifted their hopes of a sizable rate hike after a Labor Department report released Tuesday showed Consumer Price Index up 8.3 percent Sharp investors expect a slowdown in inflation in August from a year ago and 0.1% on a monthly basis.

Americans’ inflation expectations fall again in August, says New York Fed

Fed Chairman Jerome Powell

US Federal Reserve Chairman Jerome Powell speaks during a news conference after the Federal Open Market Committee (FOMC) meeting on May 4, 2022 in Washington, DC. (Photographer: El Drago / Bloomberg via Getty Images / Getty Images)

Even more concerning is that so-called core prices, which separate the more volatile measures of food and energy, accelerated again last month: core prices climbed 6.3% from the previous year, well above economists’ 6.1% forecast. and climbed 0.6% on a monthly basis – a huge increase compared to April, May, June and July, and a disturbing sign that underlying inflationary pressure The economy remains strong.

Wall Street is now penciling in a 28% chance of a super-size rate hike at the Fed’s September 20-21 meeting, according to CME Group’s FedWatch tool, which tracks trading.

Billionaire David Rubenstein warns it will be ‘difficult’ for the Fed to beat inflation

Federal Reserve Chairman Jerome Powell The central bank declined to rule out a 100-basis-point increase in the interest rate at its July meeting, during which officials voted to raise rates by 75 basis points for the second consecutive month. Powell indicated that another three-quarters of a percent increase may be on the table, but that decision ultimately hinges on upcoming economic data.

But that was before the August inflation report, which experts believe was much worse, underscoring how strong inflationary pressures still remain in the economy. Bond yields rose and stocks fell after a fall Reports worse than expected raised fears That the Fed will have to intensify its inflation fight.

US inflation

A shopper looks at organic products at a supermarket on August 23, 2022 in Montebello, California. ((Photo by Frederick J. Brown / AFP via Getty Images) / Getty Images)

The Fed is in a precarious position as it walks the line between cooling consumer demand and bringing inflation closer to its 2% target without inadvertently dragging the economy into recession. Hiking rates create higher rates on consumer and business loans, which slow the economy by forcing employers to cut spending.

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Powell acknowledged the risk of a recession, but maintained that it is more important for the Fed to contain inflation, even if an economic downturn strikes.

Speaking last month in Jackson Hole, Wyoming, he said, “While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to homes and businesses.” “These are the unfortunate costs of mitigating inflation. But failure to restore price stability will mean far more pain.”

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