Federal Reserve could take drastic measures to curb inflation

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There’s a chance the Federal Reserve could take extreme action to curb rampant inflation — including hiking interest rates by as much as a full percentage point when the central bank meets for two days beginning on Tuesday, according to analysts.

As of last week, the consensus on Wall Street had been that the Fed would increase rates by 50 basis points, or 0.5%. But on Monday, multiple news outlets including the Wall Street Journal, Bloomberg and CNBC reported there’s a distinct possibility that the Fed boosts interest rates by 75 basis points.

As of Tuesday morning, however, a fresh debate was brewing as to whether the central bank may go even further than that. Steven Englander, a top analyst at Standard Chartered Bank, told Bloomberg there was a 10% chance that Powell would have a “Volcker moment” and opt for the more extreme 100-basis-point hike.

“The Fed’s trying to erase any perception that they’re behind the curve,” Englander said. “Fifty was the big round number six months ago. Meanwhile, 75 is a very middling type of hike. So the Fed might say: ‘Look, if we want to show commitment, let’s just do 100.’”

Soaring levels of inflation are being fueled by rising energy prices.
DANIEL WILLIAM MCKNIGHT

In the late 1970s, then-Fed Chair Paul Volcker aggressively hiked interest rates, which tipped the economy into a recession and reduced soaring levels of inflation. Four decades later, Powell faces the same dilemma.

Englander said that measures once considered extreme are now widely expected.

“The Fed has been remarkably successful in having 50 the baseline,” Englander said. “Fifty was the neutron bomb even six months ago.”

Fed-dated swaps are now pricing in a 75-basis-point increase over the next three policy meetings, according to Bloomberg.

Jan Hitzius, a lead analyst for Goldman Sachs, expects a 75 basis points hike this week as well another one in July. Goldman analysts are warning that a 100-basis-point rate bump would tip the economy into a recession, according to Markets Insider.

Wall Street traders expect the interest rate to approach 4% next year.

Last week, the federal government released data showing that the consumer price index remained at a sky-high clip of 8.6% — the highest since 1981.

Inflation is being fueled by rising oil prices, the increasing cost of food and rent, and the ongoing Russian invasion of Ukraine.



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