When the Federal Reserve meets this week to boost key interest rate again, how big is big enough?
This is a debate that will be on the table when the Federal Reserve’s interestrate setting committee meets around a big oval conference table in Washington, D.C., this week.
Is it a sign of aggressive focus on fighting inflation faster, putting up a brave front despite gathering worries about a recession? Or does it signal growing worries that inflation is becoming untethered and threatening to burn hotter and longer?
The central bank will continue raising its target short-term benchmark interest rate when it announces its decision on Wednesday. Consumer inflation in June was over 9% and American companies added almost 400,000 jobs. These data give the Fed the economic backing to keep raising borrowing costs toward its goal of bringing down inflation.
And the Fed will raise rates by at least threequarters of 1% (75 basis points in Fed speak). There are zero odds the group will be less aggressive.
Less than two weeks ago, however, markets seriously considered a more hawkish hike, a full 1%. Such a jump would be the biggest increase in a single meeting since the 1980s. There was almost a 50% chance of such a significant increase, according to the CME FedWatch Tool.
Since then, several regional Federal Reserve leaders have talked down expectations of a 1% boost during the July meeting. Still, the probability market pegged the big jump with 30% odds as of Thursday.
That stronger response will not materially affect the prices of gas or eggs. Yet, it will send an unmistakable message that the Fed won’t be deterred in its inflation battle by recessionary worries. But it also may be interpreted as sealing a recessionary fate.
The Fed Open Market Committee’s sharpest tool to fight inflation — interest rates — has limited effect on the big contributors to higher prices, energy and food. The central bank’s “open mouth” tool — how it talks about its efforts and the economy — can be just as effective shaping inflation expectations of consumers and investors.
Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView