Fed Leaning Toward 0.75 Percentage Point Rate Hike

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The Federal Reserve is more likely to raise interest rates by 0.75 percentage point for the second-straight month at its July 26-27 meeting rather than the full percentage-point increase that economists have been speculating about in recent days, The Wall Street Journal reported.

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Fed officials, who entered into their premeeting quiet period on Saturday, have been saying in recent interviews and public remarks that a larger hike was less likely.

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“You don’t want to overdo the rate increases, A 75-basis-point hike, folks, is huge,” Fed governor Christopher Waller told a conference in Victor, Idaho, on Thursday, the Journal reported. “Don’t say, ‘Because you’re not going 100 [basis points]you’re not doing your job.’”

Until last week, conventional wisdom pointed to another 0.75 point increase, but speculation about a higher-than-expected increase started percolating after Wednesday’s report on June’s consumer price index, which rose at a 9.1% annual pace. That was the hottest pace since 1981 on souring fuel, food, housing and commodity prices. Russia’s war in Ukraine has raised energy prices and worsened supply chain disruptions worldwide.

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“It was just uglier than we thought,” Waller said of the CPI report, but “we don’t want to make policy on one data point, and that’s kind of a critical thing.”

While Fed officials have signaled they want to tame inflation, raising rates too dramatically could cause unnecessary weakness in the economy, the Journal reported Atlanta Fed President Raphael Bostic saying Friday at a forum hosted by the Tampa Bay Business Journal.

Speculation spiked quickly, with interest-rate futures contracts on Wednesday implying an 80% probability of a one-percentage-point increase, but that had dropped below 30% probability by Friday, according to CME Group, the Journal reported.

Kansas City Fed President Esther George said last week that “More abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated.”

Friday’s University of Michigan consumer sentiment survey said consumers’ long-term inflation expectations dropped to their lowest level in a year.

Wells Fargo chief economist had also called for the higher rate increase after Wednesday’s CPI report, but said Friday that the case for that had become less compelling, the Journal reported.

Fed members have increased rates at their last three meetings: a quarter-point in March, a half-point in May, and a 0.75-point in June, the largest rate hike at one meeting since 1994.

If the Fed raises the rate by another 0.75-point later in July, that would increase the rate to between 2.26% and 2.5%.

Economists surveyed by The Wall Street Journal this month said the chances of a recession within the next 12 months are 49%, About 46% of the economists expect the Fed to raise interest rates excessively and cause unnecessary economic weakness, 12.3% thought it would raise rates too little, and 42% said the Fed will raise rates about the right amount to balance inflation and growth.

Most expect the central bank to raise the fed-funds rate at least above 3.25% by the end of 2022 and to maintain it at or above that level through next year. They said the Fed could make its first rate cut before the end of 2023.

Write to Janet H. Cho at [email protected]

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Credit: www.marketwatch.com /

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