Fed expected to channel insider Clint Eastwood and execute another big interest rate hike

By Greg Robb

A 75 basis point move is now seen as likely, with some warning of a recession as a result

Over the past few weeks, Federal Reserve officials appear to be battling each other in a competition over who can deliver the most Clint Eastwood–esque line on the ongoing effort to bring sky-high inflation down. .

“This is a fight we can’t and don’t want to be without,” Fed Governor Christopher Waller said Friday, missing only the cheroot.

“Our resolve is firm, our goals are clear, and our tools are up to the task,” said Fed Vice Chairman Lael Brainard.

Wall Street economists got the message. In recent days, many have capitulated and updated their forecasts to predict that the Fed will raise interest rates by three-quarters of a percentage point at its next policy meeting, just 10 days from now. It would be a third consecutive move on a scale almost unheard of before this year.

This 75 basis point hike would bring the Fed’s benchmark key rate to a range of 3% to 3.25%.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said Fed Chairman Jerome Powell’s recent speech in Jackson Hole, Wyo, indicated his preference for another 0.75 percentage point rate hike during of the September meeting.

“With recent Fed speech echoing these hawkish comments and incoming data doing nothing to deter officials from another oversized hike, we expect the Fed to deliver a third 75 [basis point] rise at the September FOMC,” Luzzetti said.

Jeff Cleveland, chief economist at Payden & Rygel in Los Angeles, agreed: “I think they’re going to 75. Especially after the Bank of Canada went to 75, the European Central Bank went to 75. I want say, it’s an easy option.”

“I think most policy makers think they have to come up with 4 [percent] or maybe higher, so might as well get them faster,” Cleveland added, referring to the target fed funds rate.

See: Fed Chief Powell ‘did what he had to do’ in Jackson Hole, says Larry Summers

The 10-year Treasury yield rose for six straight weeks as traders resumed the Fed’s hawkish policy.

All this harsh rhetoric worries some economists. Having been late to start raising interest rates in the face of rising inflation, the Fed, which many fear, will compound the error in the opposite direction by tightening monetary policy too much.

“Unless there’s really bad inflation news in the coming months, we’re hoping central banks will step away from this competition to see who can rise fastest,” said Ethan Harris. , head of global economic research at BofA Global Research, in a note to clients.

Guy LeBas, chief fixed income strategist at Janney Securities, thinks it will all end in tears, he said. “The Federal Reserve will probably raise interest rates until the early parts of a recession. It will be a Jean-Claude Powell,” he said in an interview, referring to decisions by the European Central Bank in 2008 and 2011 under Jean-Claude Trichet to raise interest rates during rapidly reversed crises.

“A 75 basis point rate hike in September pretty much seals a recession in 2023,” LeBas said. “The Fed has stabbed housing and it’s just bleeding.”

Research shows that this is just one critical sector for the economy which, when house prices fall, has cascading effects causing economic activity to contract, he added.

Read more: U.S. on track for soft landing, says Goldman Sachs chief economist

-Greg Robb

 

(END) Dow Jones Newswire

09-10-22 0915ET

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