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The Federal Reserve is expected to step up its fight to curb hot inflation on Wednesday with the first 75-point rise in interest rates in nearly three decades, a move that threatens to slow US economic growth and increase financial pressure on Americans.
As inflation unexpectedly accelerates to a new 40-year high in May, the Fed is under growing pressure to move more aggressively to cooling demand and slowly rising consumer prices.
PERIOD OF INFLATION: MAPPING THE REPLY OF THE ADMINISTRATOR OF BIDEN TO THE RAPID GROWTH OF PRICES
Central bank policymakers raised the base rate by half a percentage point – twice the typical rate – in May, and set out a roadmap for similar increases at their June and July meetings, assuming data is on track. But a series of alarming reports of inflation in recent weeks could force the Fed to change course.
A a grim report from the Ministry of Labor last week showed that the consumer price index rose 8.6% in May compared to last year, faster than expected. This marks the fastest rate of inflation since December 1981 and shatters economists’ hopes that the jump in consumer prices is beginning to slow. A various study released on Monday showed that households are preparing for a much faster rise in prices – a worrying sign, as Fed officials believe such expectations can be met on their own.
“Based on interest rate movements, rapidly changing inflation expectations and a shaky investor class, we now expect the Federal Reserve to raise its interest rate by 75 basis points at its meeting in June,” said Joe Bruswell, RSM’s chief economist. “Continued rising inflation has shaken financial markets and significantly tightened financial conditions in the United States.”
The Fed has disapproved of raising interest rates by 75 basis points since 1994, stressing how severe the inflation crisis has become.
In this photo from the January 29, 2020 file, Federal Reserve Chairman Jerome Powell pauses during a press conference in Washington. (AP Photo / Manuel Balce Ceneta, File / AP Newsroom)
chairman Jerome Powell had so far avoided scaring the markets with surprising moves and previously ruled out the possibility of raising 75 basis points. But that was before reports of inflation in April and May came hotter than expected, reviving the possibility of an unthinkable earlier increase of 75 basis points. Powell also promised that all steps taken by the Fed will be guided by the latest economic data.
“What we need to see is clear and convincing evidence that inflationary pressures are easing and inflation is falling,” Powell said last month. “And if we don’t see that, then we’ll have to consider moving more aggressively.”
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Many economists believe that the Fed is acting too late to curb inflation, with the Fed’s base interest rate ranging from just 0.75% to 1.0%. Barclays, Goldman Sachs and Jeffries are now forecasting an increase of 75 basis points this week, which will set the range from 1.5% to 1.75%.
Wall Street is also preparing for a series of more aggressive interest rate hikes, with 90% of traders planning an increase of 75 basis points on Wednesday, according to CMEGroup’s FedWatch tool, which tracks trading. The possibility of a huge increase in interest rates shook the markets this week, prolonging the global sell-off, which caused the S&P 500 to collapse back into bear market territory for fears that the Fed could inadvertently cause a recession.
Although politicians are hoping to find this elusive sweet spot – known as a soft landing – history has shown that the US Federal Reserve often struggles to successfully bridge the gap between tightening policy and sustaining economic growth. Rising interest rates are leading to higher personal and business loans, which is slowing the economy, forcing employers to cut costs.
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“The work of the Federal Reserve is becoming more challenging with each passing day of inflation at a new 40-year high, combined with a broader weakening economy,” said Daniel DiMartino Booth, CEO and chief strategist and chief strategist at Quill Intelligence. adviser to the Dallas Fed. . “The Federal Reserve is tightening policy until a recession.
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