Investors predict supersized interest rate hike by Fed after red-hot inflation

The U.S. hasn’t seen inflation this high since 1981, raising the possibility the Federal Reserve may do something it hasn’t done since then to tame it: That is to raise its benchmark interest rate by a full percentage point at one time. The possibility is being penciled in after June’s 9.1% consumer price report.

Atlanta Federal Reserve Bank President Raphael Bostic told reporters “everything is in play” after the latest inflation numbers came out.

San Francisco Federal Reserve Bank President Mary Daly told The New York Times, “My most likely posture is 0.75, because of the data I’ve seen,” while Cleveland Federal Reserve Bank President Loretta Mester indicated to Bloomberg that the federal funds rate should be hiked at least 75 basis points at the July meeting.

“What I take from the report — and it was uniformly bad, there was no good news in that report at all — is that inflation remains at an unacceptably high level,” Mester said. “We at the Fed have to be deliberate and intentional about continuing on this path of raising our interest rate.”

The Fed started slowly hiking rates in March for the first time since 2018 in an effort to cool inflation, making borrowing money more expensive for everyone. But since then, inflation has continued to climb, causing the governing body to take a bigger leap in June, raising the rate 75 basis points for the first time since 1994.

“Clearly, today’s 75 basis point increase is an unusually large one and I do not expect moves of this size to be common,” Federal Reserve Chair Jerome Powell said following the June meeting and rate hike. “From the perspective of today, either a 50 basis point or 75 basis point increase seems most likely at our next meeting.”

But now, investors think 100 points could be on the table, as indicated by Wall Street bets. And on Thursday, Citigroup economists wrote in a note, “In June the committee showed it would react to each monthly inflation reading. We now expect the Fed to deliver a 100 basis-point rate hike at the meeting later this month.”

A 100 basis point hike would bring the overnight borrowing rate 2.25% higher than it was four months ago, from near zero to a range of 2.5%-2.75%.

“I have not seen any convincing evidence that inflation has turned the corner,” Mester said.

Increasing the bank’s overnight rate ripples through lending throughout the economy, causing everything from credit card interest to mortgage rates to climb. The theory is that making borrowing more expensive will suppress spending and demand, which will in turn cool inflation. Still, consumer prices have remained persistently high, with volatile categories like gas and food seeing double-digit increases over the year.

The next Federal Open Market Committee meeting is July 26-27. Powell will announce the latest rate hike at the end of the 2-day meeting.