The biggest fed rate hike in 40 years?  It could be coming this week.

The biggest fed rate hike in 40 years? It could be coming this week.

Desperate times call for desperate measures, and it could be argued that times are getting more desperate. Persistence of high inflation may force the Federal Reserve to resort to the biggest increase in the main US interest rate in more than 40 years.

After another dismal US inflation report, economists at brokerage Nomura Securities on Tuesday weighed in on the Wall Street DJIA,
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to predict a full percentage-point increase in the Fed’s benchmark short-term rate.

“We continue to believe that markets are underestimating how entrenched US inflation is and the extent of the Fed’s likely response to loosening it,” Nomura economists wrote in a report to clients.

The last time the Fed made such a drastic move was in the early 1980s – another period marked by sky-high inflation.

At each of the last two meetings, the Federal Open Market Committee which sets monetary policy raised the target rate by 0.75 points.

In August, the consumer price index rose slightly by 0.1%, mainly due to another big drop in energy prices. And the annual pace of inflation slowed slightly to 8.3% from 8.5%.

But that was almost all the good news. The cost of almost everything went up last month, including food, rent, clothing, furniture, cars, medical care and so on.

Look: Fuel costs continue to add to the rise in food costs

The result: Another price measure that the Fed viewed as a better indicator of future inflation trends rose sharply in August and hit its highest annual rate in five months.

The so-called core consumer inflation rate climbed to an annual pace of 6.3% in August from 5.9% in the previous month, according to data from the Bureau of Labor Statistics.

The backup in the heart rate is a bolder call to action, Nomura said. “We believe it is becoming increasingly clear that a more aggressive path of interest rate hikes will be required to combat inflation that is increasingly subdued due to an overheated labor market, unsustainably strong wage growth and higher inflation expectations,” wrote the firm’s analysts.

The federal funds rate, the central bank’s short-term rate, is now moving in a range of 2.25% to 2.5%. The cost of most consumer and business loans is tied to that rate.

Nomura is predicting that the rate will be raised to a range of 3.25% to 3.5% at the Fed’s policy meeting this week, and eventually, in Nomura’s view, the Fed will push that key rate as high as 4.75% in 2023.

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