July 13 (Reuters) – The US Federal Reserve is seen stepping up its battle with 40-year high inflation with an oversized 100 basis point rise this month after a sad inflation report showed that price pressures are accelerating.
“It’s all at stake,” Atlanta Fed Chairman Raphael Bostic told Florida reporters when asked about the possibility.
Although he said he still had to study the “nuts and bolts” of the report, “today’s numbers suggest that the trajectory is not moving in a positive way …. “adapting is really the next question”.
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Bostic has been among the group of central bankers in recent weeks, supporting a second consecutive 75-point increase at its next political meeting July 26-27.
But after Wednesday’s data from the Department of Labor showed that rising costs for gas, food and rent caused the consumer price index (CPI) to rise 9.1% last month compared to last month. in the previous year, opinions may be evolving. Read more
Futures traders linked to the Fed’s policy rate bet they already have it: they are now putting the price on a nearly 80% chance of a total percentage point increase at the next meeting, according to an analysis of the contracts of the Fed. CME Group.
This increased with respect to an opportunity of each new view before the report, which also showed that core inflation, excluding the most volatile food and energy prices, was accelerating monthly.
The expectation that the Fed will become more aggressive in stopping inflation is also alarming that policymakers will go too far and slow economic growth as well.
Longer-term Treasury bond yields fell, making the so-called reversal of the yield curve the sharpest it has been in more than 20 years.
An investment is seen as a harbinger of a recession because it suggests that investors are counting on a slowdown in growth. Interest rate trading suggests that investors anticipate that the Fed should cut interest rates again in the middle of next year.
“The June CPI report was a direct disaster for the Fed,” wrote Tim Duy of SGH Macro Advisors. “The deepening of the yield curve investment is calling for recession and the Fed has made it clear that it prioritizes restoring price stability above everything else.”
A person buys vegetables in a supermarket in Manhattan, New York, USA, March 28, 2022. REUTERS / Andrew Kelly
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Other central banks are also feeling the heat with the Bank of Canada raising its benchmark interest rate on Wednesday by 100 basis points to try to control rising inflation, a surprise move and its biggest in nearly 24 years. Read more
“THE THREAT OF RECESSION IS INCREASING”
Fed Chairman Jerome Powell and other policymakers have become increasingly concerned that business and consumer expectations of a torrid pace of future price increases may be consolidated. They have shown that they will react quickly when the data gets worse.
Ahead of its pre-June meeting, the Fed telegraphed a 50 basis point move before pivoting at the last minute toward a three-quarter point increase following a worse-than-expected inflation report for May, as well as reduced consumer inflation. same-day expectations survey.
The persistence of such high inflation and the strength of central bank movements needed to suppress it also sharpen once again fears of a recession on the horizon.
A Fed poll of companies across the country released Wednesday later showed rising pessimism about the outlook for the economy, with nearly half of central bank districts reporting companies see a higher risk of recession , while substantial price increases were recorded in all districts with “Most contacts expect price pressures to persist at least until the end of the year.” Read more
Fed research released this week based on modeling bond market yields places the possibility of a recession next year at around 35% if the Fed continues its expected benchmark rate hike, but at 60% if the Fed removes housing faster.
“With supply conditions showing few signs of improvement, the Fed has a responsibility to curb higher rates to allow demand to better match supply conditions. The threat of recession is increasing. said James Knightley, ING’s chief international economist.
The Fed began tightening policy only in March and has already increased its one-day loan reference rate by 1.5 percentage points. Financial markets are now predicting that the rate will reach the range of 3.5% to 3.75% by the end of the year, more than what the Fed’s own policymakers themselves predicted just three weeks ago.
So far, a very tight labor market has withstood these rapid rate hikes, with unemployment remaining at 3.6%, close to an all-time low. However, this is seen as a double-edged sword, as it also raises concerns that this competition for labor will eventually have to cool down to alleviate inflation. Read more
The U.S. Senate on Wednesday confirmed Michael Barr, a former Treasury official, as the Fed’s supervisory vice president, filling the last vacant seat on the Fed’s seven-member board. Read more
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Report by Lindsay Dunsmuir and Ann Saphir; Additional report by Howard Schneider, David Morgan and Sinead Carew; Editing by Chizu Nomiyama and Jonathan Oatis
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