Fed to put ‘firm foot on the brake pedal’ this week

Fed to put ‘firm foot on the brake pedal’ this week

The Federal Reserve is widely expected this week to raise its benchmark interest rate by 0.75 percentage points in an attempt to slow the economy as a way to cool inflation.

“What the Fed was doing earlier this year was taking off the gas,” said Carl Riccadonna, chief US economist at BNP Paribas. “This 75 [bp] moving on that brake pedal is a firm foot.”

The ultra-large hike would 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 little 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 further accelerate the pace of tightening,” said Sam Bullard, senior economist at Wells Fargo.

The Fed will announce its decision on interest rates at 2 pm Eastern on Wednesday. The central bank will also issue updated economic forecasts, and Fed Chairman Jerome Powell will hold a press conference starting at 2:30 p.m.

Read: The Fed is ready to tell us how much ‘pain’ the economy will have

Economists think Powell will be talking tough on inflation as a result of last week’s surprising consumer inflation report for August. Core inflation rose 0.6% in August, which was optimistic that inflation was picking up.

“I believe Powell has no choice but to repeat the firm tone expressed at Jackson Hole, which could be interpreted as quite hawkish,” said Stephen Stanley, Amherst Pierpont’s chief economist.

In a speech in Jackson Hole, Wyo., in late August, Powell acknowledged the likelihood of economic distress, saying that “while higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will some pain for families too. and businesses. These are the unfortunate costs of reducing inflation. But it would be much more painful not to restore price stability.”

Read: Nobel prize winning economist says Fed should go slow

Stocks suffered last week, with the Dow Jones Industrial Average DJIA,
+0.64%
down 4.1%.

Treasury yields rose sharply, with the yield on the 2-year Treasury note TMUBMUSD02Y,
3.949%
rise to a high of almost 15 years.

Strategists think the Fed will not be under pressure to deepen.

Read: Can the Fed moderate inflation without crushing the stock market

Economists are also busy revising their forecasts for inflation 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% by early 2023.

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

If the August CPI was soft as expected, Powell may have suggested that the Fed could dial back the size of its rate hikes in November. Instead Powell will have to keep his options open.

“We cannot rule out the possibility that conditions ease enough to allow the FOMC to make a change in November, but our initial assumption is that it will raise 75 basis points for the fourth meeting in a row ,” Crandall said, in a note. your clients.

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