Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

Fed’s 75-or-100 Choice Keeps Traders Guessing as Decision Nears

Economy Sep 15, 2022 15:36
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters.
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

(Bloomberg) -- Federal Reserve officials could find reasons for raising rates by a full percentage point next week if they decide to look hard enough, though the base case still looks like 75 basis points.

While most economists see the smaller -- but still aggressive -- hike as the most likely outcome of the central bank’s Sept. 20-21 meeting, a blockbuster move is not a zero risk in the aftermath of a hot reading on August core consumer inflation. Investors ascribe around 24% odds it could happen, according to pricing in interest-rate futures, and some Fed watchers view the probability as higher.

“One percent has to be on the table. They probably will stick to 75 but it’s going to be a close call because you have to think about where they’re starting from,” said Diane Swonk, chief economist at KPMG LLP. 

Following two back-to-back 75-basis-point hikes in June and July, the Fed has already raised rates 225 basis points since it commenced raising rates in March. 

Next week’s increase -- and policy makers from Chair Jerome Powell on down have made it clear that they intend to keep going -- will lift the upper level of their benchmark target rate to either 3.25% or 3.5%, assuming they move by either 75 or 100 basis points. That would put rates into territory where policy will be restraining price pressures.

“They know they have to tighten to derail inflation and they haven’t begun to do that yet,” Swonk said. “They’re playing catch up.”

Ramping up the size of tightening at this month’s meeting would send a powerful message to markets, which have at times in the past few months frustrated officials. Markets rallied following the Fed’s July meeting, taking Powell’s comments in the following press conference as dovish, even though he explicitly left the door open to an “even larger” rate hike if needed.

And inflation’s stubborn persistence, plus strength in other parts of the economy including the labor market, bolster the case for an even more aggressive Fed in the views of some. Nomura Securities, which does forecast a 100 basis-point hike next week, said upside risks to inflation in the August report will push officials to step it up.

Other economists say that while an outsize move is not impossible, ongoing high inflation will instead cause the Fed to keep raising rates for longer, pushing up the terminal rate of this tightening cycle to a higher peak. But it won’t rush to get this done, despite the higher-than-forecast increase in the August core consumer price index.

“Even if CPI doesn’t change the FOMC’s basic approach, it’s still an important incremental change, one that argues for a bit more front-loading and quite possibly a slightly higher terminal rate than otherwise,” Laurence Meyer, a former Fed governor, wrote in a note earlier this week.

The median estimate of Federal Open Market Committee participants in June, when the central bank last published its forecasts, was for rates to peak next year around 3.8%. That will likely move up in the projections updated on Sept. 21, with some seeing it shifting as high as 5%.

“There is little doubt that the inflation data will induce the Fed to be more aggressive over the next several meetings,” Roberto Perli, head of global policy research at Piper Sandler & Co., wrote in a note . “Given that inflation continues to prove itself more persistent than expected and given that most of the FOMC likely agrees with the market that a higher peak rate is called for, it’s not clear that getting there more slowly and gradually is preferable to getting there more quickly.”

While a bigger hike this month would help policy makers get to their terminal rate faster, some economists worry that it might lead markets to expect rate cuts sooner than policy makers intend.  

“Pushing back against expectations of easing next year is not merely a matter of aligning forecasts, but rather of exerting more influence over longer-term interest rates: basically the opposite of the ‘low-for-long’ strategy that many market participants have been raised on,” Michael Feroli, chief US economist at JPMorgan Chase & Co (NYSE:JPM), wrote in a note. “In this regard, a 100 basis point move next week may only encourage those who see easing next year following a Fed accelerating hikes in late ‘22.”

©2022 Bloomberg L.P.


Fed’s 75-or-100 Choice Keeps Traders Guessing as Decision Nears

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email