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Fed may discuss biggest rate hike since 1994

The Federal Reserve is likely to discuss its biggest interest rate hike since 1994 when policymakers meet this week, as a flurry of new data shows inflation is picking up and showing signs of slowing down. out more stubborn than they had hoped.

The central bank will likely weigh whether to raise interest rates by three-quarters of a percentage point on Wednesday, as it prepares to publish both its decision and a slew of new economic forecasts.

The Fed raised interest rates by half a percentage point in May, and officials have suggested for months that a similar increase be warranted at their meetings in June and July if the data develops as it does. expected. But inflation data did not come out as expected. Instead, a report last week showed inflation speed up again in May and is running at its fastest pace since 1981. Two separate measures of inflation expectationsone launched last week and one released on Monday, suggesting that consumers are starting to anticipate prices to rise significantly faster.

That would certainly increase feelings of insecurity in the Fed, which is trying to quell high inflation before it changes behavior and becomes a more permanent feature of the economic landscape. And a flurry of news has led economists and investors alike to bet that the central bank will start raising interest rates at a faster rate to signal that it has recognized the problem and is taking the lead. anti-inflation.

“They have made it clear that they want to prioritize price stability,” said Pooja Sriram, US economist at Barclays. “If that’s their plan, a more aggressive policy stance is what they need to do.”

Wall Street is preparing for interest rates to rise more than investors had anticipated just a few days ago, a fact that is sending stocks plummeting and causing blood in other markets. Investors now expect rates to rise to around 2.5 to 2.75% since the Fed’s September meeting, suggesting central banks will need to make a three-quarter move during the next three meetings. The Fed hasn’t made such a big move since the early 1990s and the upper limit of 2.75% would be the highest federal funds rate ever was since the 2008 global financial crisis.

When the Fed raises its policy rate, it filters the economy to make loans — including mortgages and business loans — more expensive. That slows the housing market, keeps consumers from spending too much, and cools business expansion, weakening the labor market and the overall economy. Slowing demand could help ease price pressures as fewer and fewer competitive buyers of goods and services become available.

But interest rates are a blunt instrument, so it is difficult to slow down the economy precisely. Likewise, it is difficult to predict how convincingly it will take to cool down inflation. Pandemic-related supply problems could ease, allowing for a reduction in speed. But the war in Ukraine and China newly proposed Locking doors meant to contain the coronavirus can drive prices up.

That is why investors and households are increasingly fearful that the central bank will trigger a recession. Consumer confidence is plummeting and a bond market signal which traders watch closely suggests that a recession could be coming. The yield on the 2-year Treasury note, a benchmark for borrowing costs, was briefly higher than the 10-year yield on Monday. The so-called inverted yield curve, where it is required to pay more to borrow for shorter periods of time, does not usually occur in a healthy economy and is generally considered a sign of a recession. impending recession.

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