Powell-ing Through Inflation

The markets believe Fed Chair Jerome Powell will announce a 75-basis point hike in interest rates on Wednesday instead of 50 as the reality of trying to stop runaway corporate greed and price hikes falls on his shoulders.

 

Just one month ago, Federal Reserve chairman Jerome Powell said that the central bank was not "actively considering" raising interest rates by three-quarters of a percentage point to fight inflation. But after Friday's consumer price index report showed inflation is rising faster than expected, Wall Street is worried that Powell may have to change his tune. 

Stocks plunged Friday and were down sharply again Monday across the globe. The yield on the benchmark US 10-year Treasury bond rose to 3.27%, the highest level since November 2018. 

Investors are nervous because the Fed could be heading into uncharted territory. A three-quarter point rate increase would certainly show that the Fed is really worried about inflation. 

But a move of that magnitude, although not unprecedented, is exceedingly rare. The last time the Fed hiked rates by 75 basis points was in the Alan Greenspan era: November 1994.  

To be sure, the market still has some doubts that the Fed will be that aggressive at this Wednesday's meeting. According to fed funds futures listed on the CME, traders are pricing in a 60% chance that the central bank will raise rates by only a half point. But expectations for a three-quarters-of-a-point increase have gone up from just 3% a week ago to 40% now. 

Economists at Barclays think the Fed will announce a three-quarter-point hike Wednesday "to reinforce credibility and get ahead of inflationary pressures. The broader game plan will likely be to raise rates as expeditiously as possible." 

Jefferies economists have also now joined the 75 basis point camp, saying in a report over the weekend that "inflation isn't peaking, it isn't even plateauing. It is still accelerating, and it will likely do so again in June." 

The Jefferies economists added that even though "the Fed hates surprising the market ... the sharp increase in inflation expectations" is "an escape clause and gives Powell an out."

 

I would bet on the 75-point hike, and more in the future, and since the real cause of "inflation" is record profiteering by corporations, the rate hikes are going to stop the Biden Boom in its tracks.

 

Things are going to get bad in the months ahead.