The biggest Fed rate hike in 40 years? It could be coming next week.

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Desperate times call for desperate measures, and times are, arguably, increasingly desperate. The continuation of high inflation could force the Federal Reserve to resort to the biggest hike in a key US interest rate in more than 40 years.

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Following another disappointing US inflation report, economists at brokerage Nomura Securities became the first on the Wall Street DJIA on Tuesday,
-3.94%
To predict a full-percentage-point increase in the Fed’s benchmark short-term rate.

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Economists at Nomura wrote in a report to clients, “We believe that markets underestimate how deep U.S. inflation has deepened and the magnitude of the response will be necessary for the Fed to remove it.”

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

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In each of the last two meetings, the monetary-policy-setting Federal Open Market Committee raised the target rate by 0.75 points.

In August, the Consumer Price Index rose marginally by 0.1%, mainly due to another major drop in energy prices. And the annual pace of inflation slowed slightly to 8.3% from 8.5%.

But that was almost all good news. The cost of almost everything, including food, rent, clothing, furniture, cars, medical care, etc. rose last month.

Fuel costs continue to contribute to increased food costs

Result: Another price measure seen by the Fed as a better indicator of future inflationary trends rose sharply in August to the highest annual rate in five months.

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

Nomura said the core rate has a call for backup boulder action. The firm’s analysts wrote, “We believe it is becoming increasingly clear that there is more need for interest rate hikes to counter inflation stemming from extreme heat in the labor market, continued strong wage growth and higher inflation expectations.” An aggressive route would be needed.”

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

Nomura predicts that the rate will be raised from 3.25% to 3.5% at the Fed’s policy meeting next week, and the Fed, in Nomura’s view, will eventually raise that key rate to 4.75% in 2023.

Credit: www.marketwatch.com /

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