© Reuters. Another 75bps rate hike in July?Fed officials start building momentum for next month as soon as the “mute” is lifted
Financial Associated Press, June 16 (Editor Xiaoxiang) This Wednesday, the much-anticipated Fed meeting on interest rates in June came to an end. The Fed decided to raise interest rates by 75 basis points at this meeting, raising the target range of the federal funds rate to 1.5%-1.75%. This 75 basis point rate hike is the largest since 1994. And now, just a few days before the June interest rate meeting – the Fed officials who ended the “silence period” have already started to build momentum for the same rate hike next month…
Waller, a hawkish Fed hawk who has risen to prominence over the past year, is one of those “vanguards.” “If the data meet my expectations, I will support action of a similar magnitude at the July meeting, and the Fed will be ‘all in’ to restore price stability,” Waller said in a remarks released Saturday.
Waller, one of the first officials to advocate for a quicker exit from the ultra-easy monetary policy imposed during the pandemic, had urged to start the process in August, when the Fed’s benchmark interest rate was still firmly locked at zero. At the same time, it will still buy $120 billion in bonds every month to support the economy.
Although the Fed finally announced the start of the Taper process in November last year, it was only in March of this year that it completely pulled out of its asset purchase program and started raising interest rates to curb inflation, which is currently at the highest level in 40 years.
Some critics have blamed the Fed’s delay in tightening policy on a new policy framework it adopted in 2020 that ruled out rate hikes in response to falling unemployment, even when real inflation readings remained low. In this case, interest rates will be raised accordingly.
The problem, Waller said Saturday, is that the Fed has been too specific in its commitment to when to end asset purchases. Structural changes in the economy mean there is a “considerable possibility” that the Fed will cut its policy rate to zero again in the future and buy Treasuries to combat a downturn and even recession, he noted.
He said he would support a less restrictive commitment from the Fed the next time it ends its bond-buying program, and more clarity on not only when the Fed will start tightening, but how quickly.
“Dove” also changed to “Eagle”?
According to the Fed’s latest interest rate dot plot released this week, the median forecast of 18 Fed officials showed that the benchmark interest rate will rise to 3.4% by the end of this year, which indicates that the Fed is likely to need to raise interest rates by 175 basis points before the end of the year. .
Federal Reserve Chairman Powell said at a press conference after the interest rate decision, “In the current situation, we expect continued interest rate hikes to be appropriate. At the next meeting, a 50 basis point increase in interest rates or a further 75 basis points of interest rate hikes are both appropriate. It’s possible.”
As for whether it will be 50 basis points or 75 basis points? At present, more market participants are obviously more inclined to the latter. The probability of the Fed raising rates by 75 basis points next month is now 86.2%, compared with just 13.8% for a 50 basis point hike, according to CME Group’s Fed Watch tool.
In fact, not only hawkish officials within the Fed like Waller, but even some of the most high-profile Fed dovish figures, in their latest statement after the “silent period”, expected a 75 basis point rate hike next month.
Minneapolis Fed President Neel Kashkari said on Friday that he may support another 75 basis point rate hike by the Fed in July.
“I supported raising the federal funds rate by 75 basis points at this week’s meeting and may support another such move in July,” Kashkari wrote in a blog post. The Fed president also said that a “prudent strategy” after the July meeting may be to continue raising rates by 50 basis points until inflation falls well to 2%.
As for the end of the current rate hike cycle, Kashkari believes that “the shock of restricting supply will start to subside next year, which will allow the Fed to ease policy slightly in 2024. However, if the supply side of the economy does not improve, or if inflation Expectations rise even higher, then we may need to keep raising rates beyond my expectations.”
Kashkari does not have a vote in this year’s FOMC. According to the ranking of industry institutions, Kashkari has been the most dovish official within the Fed for the past two years.
Federal Reserve Chairman Jerome Powell will testify before the Senate Banking, Housing and Urban Affairs Committee next Wednesday and the House Financial Services Committee next Thursday, and his testimony should be watched closely by investors. The Fed’s semi-annual monetary policy report released on Friday showed that inflation is tormenting American households, and the Fed’s commitment to restoring price stability is “unconditional.”