Fed considers game changer to push inflation: Guidelines for decision-making

Fed considers game changer to push inflation: Guidelines for decision-making – Mail Bonus


Governor Jerome Powell, who has been calling for a rate hike over the past four years, seems likely to leave gradually and move more vigorously to curb inflation, with growing concerns that it will persist.

The Federal Open Market Commission is expected to raise interest rates by 75 basis points on Wall Street, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc, citing rising US inflation expectations in search of the largest increase in nearly three decades. .

The central bank will announce the decision and publish new forecasts at 2 pm on Wednesday in Washington. Powell will hold a press conference 30 minutes later.

“The usual rule of thumb is that if you’re worried about how your movements will affect the financial market, move carefully,” said Jonathan Millar, Barclays’ chief economist, among the first to call for 75 points. “You are worried about the danger of breaking something. In this case, it’s worth breaking something. We are in a very important place as it seems that their credibility is beginning to decline. ”


Powell said last month that the central bank was not actively considering a 75-point move, but did not rule it out if circumstances changed. Although the governor outlined a 50-point rise in June and July, he also defended, saying it depended on the economy developing as officials expected. Economists Citigroup Inc. and Bank of America Corp. are among those who still think that the central bank will change by 50 basis points as previously estimated.

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On Friday, data showed that the consumer price index rose by 8.6% in the 12 months to May, the highest in 40 years, and contradicts forecasts that inflation has already peaked. The Central Bank has a target of 2% inflation, based on a special measure – the consumer spending index, which was 6.3% in April.

An even more worrying issue for central bankers was the University of Michigan’s opinion poll, which showed that respondents expect prices to rise by 3.3% annually over the next five to 10 years, the highest since 2008 and up from 3% in May.

What Bloomberg Economics says …
“FOMC will raise the interest rate of federal funds by 75 basis points at its meeting in June. One or more deaf committee members may disagree. In light of surprisingly rising inflation measurements in recent months, Powell will argue that an oversize is needed to prevent inflation expectations from falling.

– Anna Wong, Chief Economist of the United States

Both Barclays and Jefferies, who were among the first to divert their calls to the central bank, cited the Michigan poll as key evidence that inflation expectations could be reduced, and Jefferies called it a “game changer.”

Market pricing
“The Fed’s goal is to keep inflation in check,” said Diane Swonk, chief economist at Grant Thornton LLP. “People’s behavior is changing. It will be much harder to get off track later. You can not make mistakes of the seventies. You have to deal with reducing global demand with limited supply, as painful as it may be. ”

Markets began to price in a 75-point movement following Monday’s New York Fed survey which showed that US consumers expect prices to rise even faster next year, as well as reports from the Wall Street Journal and other news outlets, including Bloomberg News on such a movement.


The central bank usually moves deliberately and tries to prevent excessive fluctuations such as declining anger in 2013, when the Treasury’s yield rose sharply under Ben Bernanke, the then central bank governor.

“Market prices for the Fed’s aggressive actions have accelerated and we believe that policy makers are likely to lean towards them,” said Robert Dent, an economist at Nomura Securities. The Central Bank is concerned about the “risk of an inflationary process. Markets have now given the central bank the opportunity to move faster.

While Powell has vowed to be “agile”, the 75-point move would be a striking change in the way the chair manages the market. FOMC gave investors a few months’ notice before canceling its purchases of government bonds and collateralised securities and raising interest rates from zero in March.


“Chairman Powell just hates surprising markets,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. While 75 points seems likely, “there is a greater chance than now in the markets that they will keep the original plan.”

Point plot
Their median interest rate plans could rise to around 3% by the end of the year, or 2 percentage points higher than current interest rates. In March, officials estimated that their policy rate would end in 2022 at 1.9%.

That said, Fed leaders are preparing their point forecasts for a research team well in advance, so there is a risk that the points do not reflect the latest compelling inflation.


Although Powell said his goal was a “soft landing” of low inflation and a strong labor market, the FOMC’s forecasts could also provide insight into how comfortable the committee would be with some increase in unemployment to help cool the economy and inflation. . Estimates could show that unemployment will rise in 2023 and 2024 from the 3.5% forecast for this year.

“Right now, they sound like inflation, inflation, inflation,” said Thomas Costerg, a senior U.S. economist at Pictet Wealth Management. “What we are going to try to read between the lines is whether or not they really believe that a contraction is what is needed to lower inflation. The code for the recession is whether or not they see unemployment increase in 2023. That would be a very bad message. ”


The tone of Powell’s press conference highlighting the Fed’s commitment to curb inflation will be particularly important ahead of June 22 and 23, his six-month testimony before Congress.

Police are criticized at a high price, which has become the main concern of the United States, which harms the position of Democrat Joe Biden with voters for parliamentary elections in November.

“He’s going to be pretty sad,” Reinhart said. “You will have a relatively hawkish message to convey. He must be wearing a black suit and a dark tie. ”


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