Desperate times call for desperate measures, and the times are, arguably, increasingly desperate. The persistence of high inflation may force the Federal Reserve to resort to the biggest increase in a key US interest rate in more than 40 years.
After another dismal U.S. inflation report, economists at brokerage Nomura Securities on Tuesday topped the Wall Street DJIA,
to forecast a full percentage point increase in the Fed’s short-term benchmark rate.
“We continue to believe that markets are underestimating how entrenched US inflation has become and the size of the response likely to be required by the Fed to dislodge it,” Nomura economists wrote in a note to clients.
The last time the Fed made such a drastic move was in the early 1980s—another period marked by excessively high inflation.
At each of the last two meetings, the Federal Open Market Committee raised its target rate by 0.75 basis points.
In August, the consumer price index rose a scant 0.1%, largely due to another big drop in energy prices. And the annual rate of inflation slowed slightly to 8.3% from 8.5%.
But that was essentially all the good news. The cost of almost everything went up last month, including food, rent, clothing, furniture, cars, medical care, and so on.
I see: Fuel costs continue to drive up food costs
The result: Another measure of prices seen by the Fed as a better indicator of future inflation trends rose sharply in August to its highest annual rate in five months.
The so-called core rate of consumer inflation rose to an annual rate of 6.3 percent in August from 5.9 percent the previous month, according to data from the Bureau of Labor Statistics.
The backup in the key rate is a call for bolder action, Nomura said. “We believe it is increasingly clear that a more aggressive course of rate hikes will be needed to combat increasingly entrenched inflation stemming from an overheating labor market, unsustainably strong wage growth and higher inflation expectations.” , the company’s analysts wrote.
The federal funds rate, the central bank’s short-term interest rate, is now in a range of 2.25% to 2.5%. The cost of most consumer and business loans is tied to this interest rate.
Nomura predicts that interest rates will rise to a range of 3.25% to 3.5% at the Fed’s policy meeting this week, and the Fed, in Nomura’s view, will eventually push that key rate up to 4, 75% in 2023.