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Inflation is gaining momentum: does the Fed have the courage to radically raise interest rates?

Inflation is gaining momentum
Does the Fed dare a radical rate hike?

By Jan Ganger

The United States is suffering from high inflation. The price pressure is so high that it could force the Fed to raise interest rates surprisingly high.

Jerome Powell doesn’t like surprises at all. The head of the US Federal Reserve is preparing financial markets for when they can expect a change in interest rates and how much. Then you have enough time to adapt.

Therefore, it was considered a foregone conclusion that the Fed will raise interest rates by 0.5 percentage points this Wednesday. Because this was what the central bankers had unequivocally reported. But now it looks like interest rates could rise to 0.75%. For context: The last time the Fed took such a big step in 1994.

But the situation is serious. The US Department of Labor released disappointing inflation figures on Friday. Contrary to general expectations – and the Fed’s hopes – the general increase in prices has picked up speed. At 8.6%, it reached its highest level since December 1981.

This has greatly increased the pressure on the Fed. At its last meeting in May, it had already raised interest rates by 0.5 percent to a range of 0.75 to 1 percent. This was the biggest step in 22 years.

Fear of inflation is growing

During the press conference, Powell said the central bank wanted to avoid uncertainty about rate hikes. At the same time, he did not rule out surprises. “We will have to be flexible with incoming data and evolving prospects,” he said. Put simply, this means that if the inflationary pressure does not subside, the Fed will act decisively.

And that’s exactly where the Fed could be now.

Not only has inflation increased, but Americans’ fears of inflation are also growing. On Friday, the University of Michigan released its widely publicized index on consumer long-term inflation expectations. It hit its highest level since 2008. And on Monday, the New York Federal Reserve Board reported that its poll showed consumers’ near-term inflation expectations are rising.

In this context, the Fed wants to prevent inflation from taking hold. Since Powell and his Fed colleagues have not been able to comment publicly since June 4 due to the internal rule known as a “blackout,” they may have chosen a different way to prepare financial markets for the possibility of even higher interest rates: Problems Financials in the “Wall Street Journal” usually very well informed reported that the Fed was considering a 0.75% rate hike.

Investment banks are expecting a sharp rise in rates

This does not mean that interest rates will actually increase at this rate. But the financial markets are already considering this possibility. This can be seen, for example, in the stock market. Prices are falling as some investors expect higher interest rates. As interest rates rise, stocks become less attractive than other forms of investing.

Major Wall Street banks are now expecting a steep rate hike of 75 basis points, including Goldman Sachs, JP Morgan Chase, Barclays and Jefferies. But that doesn’t mean it will actually happen. The decision will be made behind closed doors at today’s central bank meeting. It should be an intense discussion.

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