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According to the ‘Wall Street Journal’, Fed officials who meet on Tuesday and Wednesday will reconsider their positions to take into account the acceleration of inflation. Instead of 50 basis points they could raise rates by 75 bp
(Boursier.com) — Officials of the US Federal Reserve, which meets its monetary policy committee (FOMC) on Tuesday and Wednesday, plan to raise key rates by 75 basis points this week, and not by 50 bp as expected until here by the markets, according to information published Monday evening by the ‘Wall Street Journal’. Many brokers, including Goldman Sachs and Morgan Stanley, share this opinion, given the surprise acceleration of inflation in May in the United States.
The US financial daily did not cite sources, but said US central bank officials will reconsider their positions to take account of several reports published recently, and showing that inflation is not only historically high but continues to accelerate. Remember that the members of the Fed are currently kept silent, according to the “quiet period” rule observed for about ten days preceding the FOMC meetings.
The yield of the American “2 years” rises to 3.42%
The Wall Street Stock Exchange plunged Monday on these rumors, while on the bond markets, the rates continued their flight started Friday after the publication of inflation figures in the United States, which created a shock with a surge in consumer prices of 8.6% over one year in May.
The performance of T-Bond at 10 years climbed another 7 basis points (hundredths of a point) on Tuesday evening to reach 3.44%, while the rate of the T-Bond at 2 yearsconsidered the best indicator of market expectations vis-à-vis the Fed, soared 14 bps to end the day at 3.42%, the highest since November 2007!
To curb the surge in inflation, the US central bank has already raised the “fed funds” rate, its main key rate, by 75 basis points since March (+25 bp in March and +50 bp in May) to bring it within a range of 0.75% to 1.00%.
Powell did not rule out 75bp hikes if needed to rein in inflation
Even though expectations were only 50 bp a few days ago, the main brokers in the market, including Goldman Sachs and Morgan Stanley, are now betting on a very strong move of 75 bps on Wednesday. “We shared the universal consensus that the FOMC would raise rates by 50 basis points (…). But the release of higher than expected inflation for May now leads us to expect a rate hike of 75 basis points. basis”, underlined Wells Fargo in a note. Other analysts point out, however, that such an increase would be useless, and could be interpreted as a panic movement by the American central bank.
According to the CME Group’s FedWatch tool, which reflects market expectations, the probability of such a rate hike was 95% on Tuesday evening. For the end of the year, the FedWatch tool essentially shows forecasts of 3.5-3.75% (37.4% probability) and 3.75-4% (39.4% probability) for the range fed funds rates.
Steps of 50 or 75 basis points?
In addition to the rate hike expected tomorrow, theTraders expect the Fed to signal the possibility of another 50bp (or even 75bp) rate hike in July. Beyond that, it is unlikely that the US central bank will already give clear indications for its September meeting. It should nevertheless leave the door open to a change in increments of 50 or 75 basis points. In addition, Jerome Powell, head of the institution, could explicitly reject the idea of a break from the Fed still hoped for a short time ago.
On May 18, the head of the Fed told the ‘Wall Street Journal’ that the Fed’s plan was to raise its key rates in stages by half a point during its next meetings, but he did not not rule out larger hikes, by 75bp if necessary.
The Federal Reserve will “need to see clear and convincing evidence” that inflation is easing before slowing the pace of rate hikes. “If we don’t see it, we will have to consider acting more aggressively” to tighten financing conditions, he added.