Fed officials have indicated they aren’t satisfied with progress toward lower inflation, which stood at 8.5% in July.
The Federal Reserve is making clear its determination to stamp out inflation with hefty interest-rate hikes.
“We need to act now, forthrightly, strongly as we have been doing,” Fed Chairman Jerome Powell said Sept. 8. “My colleagues and I are strongly committed to this project and will keep at it.”
Fed officials’ recent hawkish comments have led many experts to conclude that the central bank later this month will raise interest rates by 0.75 basis percentage point (75 basis points).
That would match its moves in June and July. The Fed has lifted rates by 225 basis points in total since beginning its tightening campaign in March.
Interest-rate futures traders see an 86% probability that the Fed will go 75 basis points at its September meeting.
And you can count Goldman Sachs economists, led by Jan Hatzius, among those who anticipate that move.
Goldman Sachs Commentary
“We are raising our Fed forecast to include a 75-basis-point rate hike in September (versus 50 basis points previously) and a 50-basis-point hike in November (versus 25 basis points previously),” they wrote in a Sept. 7 commentary.
The economists continue to expect a 25-basis-point increase in December, pushing the federal funds rate to 3.75% to 4% at year-end.
“Fed officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation has not been as uniform or as rapid as they would like,” the economists said.
Consumer prices soared 8.5% in the 12 months through July.
They also cited a Sept. 7 Wall Street Journal story saying the central bank “appears to be on a path to raise interest rates by another 0.75 percentage point this month.”
That’s “a likely hint from the Fed leadership that a 75-basis-point hike is coming at the September meeting,” Goldman said.
Growth Slowdown Seen
The Fed tightening “should be enough to keep growth on a solidly below-potential path in the second half of 2022,” the economists said. GDP shrank 0.9% annualized in the second quarter and 1.6% in the first.
The rate lifts could extend into 2023, they said. “How the drag from tighter financial conditions will net out with other key growth impulses in 2023 is more uncertain, and we could imagine the hiking cycle extending beyond this year.”
Meanwhile, famed investor Cathie Wood, chief executive of Ark Investment Management, thinks that the central bank is going in the wrong direction.
“The Fed seems to responding to covid-related supply shocks spanning 15 months the same way that [former Fed Chairman Paul] Volcker battled inflation that had been brewing and building for 15 years,” she tweeted.
Volcker sent interest rate soaring in the early 1980s to quell double-digit price increases.
But given the Fed’s current overshoot, “I would not be surprised to see a significant policy pivot in the next three to six months,” Wood said.
