The Fed will put a “firm foot on the brake pedal” this week

The Fed will put a “firm foot on the brake pedal” this week

The US Federal Reserve is widely expected this week to raise its key interest rate by 0.75 percentage points in a bid to slow the economy as a way to reduce inflation.

“What the Fed did earlier this year was take its foot off the gas pedal,” said Carl Riccadonna, chief U.S. economist at BNP Paribas. “This 75 [bp] Traffic is a steady foot on that brake pedal.”

The extraordinarily large hike will bring the Fed’s policy rate to a range of 3% to 3.25% – a level that Fed officials believe will begin to curb economic growth.

Markets are pricing in the slim chance of a 100 basis point move, but economists are skeptical.

“We doubt there is a consensus for the FOMC to go that far and accelerate the pace of further tightening,” said Sam Bullard, senior economist at Wells Fargo.

The Fed will announce its interest rate decision at 2 p.m. east on Wednesday. The central bank will also release updated economic forecasts and Fed Chairman Jerome Powell will hold a press conference from 2:30 p.m.

Reading: The Fed is ready to tell us how much “pain” the economy will suffer

Economists believe Powell will talk tough on inflation as a result of last week’s surprisingly hot consumer inflation report for August. Core inflation rose 0.6% in August, dashing upbeat hopes that inflation was easing.

“I think Powell has no choice but to repeat the steady tone set in Jackson Hole, which can be interpreted as quite hawkish,” said Stephen Stanley, chief economist at Amherst Pierpont.

In his speech in Jackson Hole, Wyo., in late August, Powell acknowledged the possibility of economic distress, stating that “while higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain in households and businesses. These are the unfortunate costs of deflation. But a failure to restore price stability would mean much greater pain.”

Reading: Nobel Prize-winning economist says the Fed should go slow

Stocks fell last week, with the Dow Jones Industrial Average DJIA,
-1.24%
down 4.1%.

Treasury yields rose sharply, with the yield on the 2-year TMUBMUSD02Y bond,
3.949%
surges to a near 15-year high.

Strategists believe the Fed will not be swayed by an ever-larger sell-off.

Reading: Can the Fed tame inflation without crushing the stock market?

Economists are also busy revising their inflation forecasts and the Fed’s policy date.

Michael Feroli, chief US economist at JP Morgan, raised his forecast for the Fed Funds rate to 4% to 4.25% through early 2023.

Lou Crandall, chief economist at Wrightson ICAP, believes the latest CPI report changes the basis for the Fed’s next meeting on November 1-2.

If August’s CPI had been as soft as expected, Powell could have suggested the Fed could scale back the size of its rate hikes in November. Instead, Powell should keep his options open.

“We can’t rule out the possibility that conditions will soften enough to allow the FOMC to taper in November, but our initial assumption is that it will achieve a 75 basis point hike for a fourth consecutive meeting,” Crandall said in a note. to customers.

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