Under pressure to curtail runaway inflation, Fed could go very big with next rate hike
The Federal Reserve is an institution that relies on confidence and consistency. Both have been shaken as the central bank struggles to tamp down inflation and regain the trust of investors.
Fed leaders gather in Washington, D.C. this week for a scheduled interest-rate setting meeting. The group will raise its target shortterm borrowing rate again, and it’s likely to be another three-quarters of 1% percent increase. But there’s a chance the bankers could go even bigger.
Any rate hike will bring the Fed’s benchmark interest rate to its highest level since 2008.
A 1% rate increase would represent a significant acceleration in the bank’s fight against inflation and a manifestation of its efforts to reclaim, some would argue maintain, credibility.
This rate-tightening cycle started slowly. It wasn’t until consumer inflation had already jumped to 8.5% when the Fed finally took its first step by raising rates one-quarter of 1%. That was in March. By May, it hiked rates by a one-half of 1%. Six weeks later, the central bank boosted rates by three-quarters of 1%. And the Fed repeated that step again in July.
Yet, inflation has shown itself to be stubborn. In August, consumer prices leaped 8.3%, driven by an even higher year-over-year increase in food prices. Stocks took this as a sign that the Fed could become even more aggressive now and keep raising rates for longer.
The inflation-induced stock sell-off last week indicates just how shaken the market’s confidence is in the Fed to curb inflation without triggering a broad economic recession.
Market odds of the Fed increasing its benchmark interest rate by 1% shot up in the wake of the recent inflation report. Wall Street investors priced in a one-infour chance of the bigger hike. However, the CME FedWatch indicated traders were slowly losing confidence the central bank would accelerate its monetary tightening that much.
An even more aggressive Fed this week would mean higher borrowing rates for mortgages, car loans and businesses. It would not mean lower grocery prices.
And that should not be a surprise.
Tom Hudson is a financial journalist in Washington, D.C. He’s the chief content officer at WAMU public radio station.