Fed expected to channel its inner Clint Eastwood and execute another big interest-rate hike

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Over the past few weeks, Federal Reserve officials seem to be falling down on each other in the competition over who can deliver the most Clint Eastwood-esque line about the ongoing effort to reduce sky-high inflation.

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“This is a fight we cannot and will not walk away from,” Fed Governor Christopher Waller said on Friday.

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“Our resolve is firm, our goals are clear, and our equipment is up to date,” said Fed Vice Chairman Lyle Brainard.

Wall Street economists have got the message. In recent days, many have predicted that the Fed will raise interest rates by an ultra-large three-quarters of a percent, just 10 days away, at its next policy meeting. This will be a third straight move of a magnitude that was almost unheard of before this year.

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This 75-basis-point increase would raise the Fed’s benchmark policy rate to a range of 3% to 3.25%.

Matthew Luzzetti, chief US economist at Deutsche Bank, said Fed Chairman Jerome Powell’s recent speech in Jackson Hole, Va., signaled his preference for a 0.75 percentage-point rate hike at its September meeting.

“The recent Fed-speak these sordid comments and the incoming data has done nothing to distract officials from yet another supersized hike we expect the Fed to deliver a third 75. [basis point] Increase in September FOMC,” Luzzetti said.

Jeff Cleveland, chief economist at Peden & Riegel in Los Angeles, agreed: “I think they’re 75. Especially after the Bank of Canada’s 75, the European Central Bank turned 75. I mean It’s an easy option.”

“I think most policy makers think they need to get to 4″ [percent] Or maybe higher, as well as their uptake,” Cleveland said, referring to the targeted federal funds rate.

Fed chief Powell ‘did what he needed to do’ at Jackson Hole, says Larry Summers

10 Year Treasury Yield TMUBMUSD10Y,
3.357%
has risen for six weeks in a row as traders pick up on the Fed’s bullish policy stance.

All these difficult things have started worrying some economists. Too late to start raising interest rates due to rising inflation, the Fed, many fear, will exacerbate the mistake in the opposite direction by tightening monetary policy too much.

“Unless there is very bad inflationary news in the coming months, we expect central banks to shy away from this competition,” Ethan Harris, Head of Global Economics Research at BofA Global Research, said in a note to clients.

Guy Lebus, chief fixed income strategist at Jenny Securities, thinks it will all end in tears, he said. “The Federal Reserve will probably raise interest rates in the early parts of the recession. It’s going to be a Jean-Claude Powell,” he said in an interview, referring to European Central Bank decisions under Jean-Claude Trichet in 2008 and 2011. While raising interest rates during the crisis that were quickly reversed.

“A 75-basis-point rate hike in September substantially staves off a recession in 2023,” LeBas said. “The Fed has stabbed housing and it’s just bleeding.”

Research shows that this is just one important sector for the economy that when home prices fall, it will have a cascading effect that will lead to a contraction in economic activity.

US on a soft landing, says Goldman Sachs chief economist

Credit: www.marketwatch.com /

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