(Bloomberg) – The Federal Reserve looks set to extend its steep interest rate hikes further than previously expected after another sweltering inflation report dampened hopes of a downward turn by the end of the year.
Investors responded to higher-than-expected readings of core consumer prices in the US by increasing bets that the Federal Reserve will raise interest rates by 75 basis points at its meeting next month and in December. Futures pricing also showed for the first time that markets are seeing rates close to 5% next year.
“The pressure on the Fed is high,” said Diane Sonk, chief economist at KPMG LLP. She said the report likely means the Fed will raise three-quarters of a percentage point in the last two meetings of this year, representing five consecutive increases of that size.
“They should raise prices and if the rest of the world can take it, they will,” Sonk said.
Core prices, which exclude food and energy, rose 6.6% in September from a year ago, the highest level since 1982, according to a Labor Department report published earlier Thursday. This continues a worrying pattern for policy makers after the gauge accelerated in August as well.
“That’s the trend now. One month isn’t making the trend,” Sonk said.
Several Fed officials recently cited the sharp rise in core inflation in August as a sign of worrying consolidation even among the less volatile price categories.
San Francisco Fed President Mary Daly said earlier this month that it was “really hard” to slow the pace of policy tightening amid rising core inflation.
However, even the most hawkish officials rejected the idea of raising interest rates by a full percentage point or more in one meeting, because that would make it difficult for the Fed to monitor the effects of its tightening on the economy and increase the risks of causing a severe recession.
“By moving in and looking at the data and seeing how the economy is responding, it allows us to try to measure the dose somewhat, while continuing to move aggressively,” Minneapolis Fed President Neil Kashkari said Wednesday. “If we just go up 2%, 3%, or 4% in one take, that could be too much, and we end up exaggerating it unnecessarily.”
The Fed raised interest rates from nearly zero in March to a target range of 3% to 3.25%, the highest since 2008 and the most aggressive pace since the 1980s. It has also allowed assets to slip off its balance sheet at maturity, which will also contribute to tightening in the financial sector.
Economists in Barclays (LON 🙂 Plc raised the Fed’s demand to 75 basis points in November and December and 50 basis points in February, they wrote in a note to clients after the data.
“At the last three meetings of 2023, we now expect the FOMC to reflect 75 basis points in rate cuts,” Barclays analysts said, referring to the FOMC policy-making committee.
Six of the Fed’s 19 policymakers expected the upper limits of the rate target range to reach 5% next year, according to estimates published in the “point chart” in September, although the median forecast was for a peak of 4.75%.
Thursday’s report showed that service sector inflation was rising, with costs for medical care and shelter soaring.
“There is a determination, particularly on the services side, of inflation,” Seth Carpenter, Morgan Stanley (NYSE 🙂 said the world’s chief economist in an interview with Bloomberg TV.
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