U.S. inflation is still likely to come down “in coming months,” but the Federal Reserve has “zero patience” and will continue to hike its benchmark interest rate by three-quarters of a percentage point in July and September, said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
“A 75-basis-point hike is teed up for July, and there’s a potential for a full 100 [basis point] move, although the Fed doesn’t necessarily want to do that,” Porcelli said.
The market is starting to price in another 0.75-percentage-point move in September, he noted, matching a mid-June interest-rate increase that was the most dramatic since 1994.
U.S. consumer inflation climbed to a 41-year high of 9.1% in June, as gasoline prices surged.
Porcelli said that inflation will begin to cool but that this process will take some time. “It is too early for inflation to really start the process of slowing in earnest,” Porcelli said.
For instance, businesses are struggling with high inventories and are eventually going to start discounting, he said.
Since March, the Fed has pushed up its benchmark policy rate to a range of 1.5% to 1.75% after keeping rates at ultralow levels close to zero through the first two years of the coronavirus pandemic.
Traders are expecting a 0.75-percentage-point rate hike at the Fed’s meeting in two weeks, but the odds of a larger move have gone up materially.
Aichi Amemiya, economist at Nomura Securities, said the Fed would now hike by 100 basis points – that is, a full-percentage-point-interest rate increase.
“Incoming data suggest the Fed’s inflation problem has worsened, and we expect policymakers to react by scaling up the pace of rate hikes to reinforce their credibility,” Amemiya said.
Michael Pearce, senior U.S. economist at Capital Economics, said he thinks speculation of a 100-basis-point hike this month “looks to be misplaced.”
“While some will draw parallels with the shockingly bad May CPI report, the backdrop is markedly different — commodity prices have fallen sharply, and we’ve seen clearer signs signs of an economic slowdown, both of which will contribute to weaker price pressures ahead,” Pearce said.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, sees the Fed raising the federal funds rate by 75 basis points at each of the July and September policy meetings, she said Wednesday.
Experts don’t know how high the Fed will have to push its benchmark rate to bring inflation down to its 2% annual target.
Michael Gapen, U.S. economist at Bank of America Securities, said he expects a peak fed funds rate in a range of 4% to 4.25% by next May, with the Fed expected to hike by 175 basis points in total over the next four meetings.
The yield on the 10-year Treasury note
moved above 3% after the June CPI data were released.