The Federal Reserve could raise its key rate by 1%

Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022.

Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022.

PA

The Federal Reserve is an institution built on trust and consistency. Both have been rattled as the central bank struggles to contain inflation and regain investor confidence.

Fed leaders are gathering in Washington, DC, this week for a scheduled meeting on setting interest rates. The group will raise its target short-term borrowing rate again, and it is expected to be another three-quarters increase of 1%. But there is a chance that bankers could go even further.

Any rate hike will take the Fed’s benchmark interest rate to its highest level since 2008.

A 1% rate hike would represent a significant acceleration in the bank’s fight against inflation and a manifestation of its efforts to regain, some would say maintain, its credibility.

This rate-tightening cycle started slowly. It wasn’t until consumer inflation had already jumped to 8.5% that the Fed finally took its first step by raising rates by a quarter of 1%. It was in March. In May, it raised rates by half a 1%. Six weeks later, the central bank raised rates by three-quarters of 1%. And the Fed repeated this step in July.

However, inflation has been tenacious. In August, consumer prices jumped 8.3%, led by an even stronger year-over-year increase in food prices. Stocks took this as a sign that the Fed could get even more aggressive now and keep raising rates for longer.

Last week’s inflation-driven sell-off in stocks indicates how much market confidence is shaken in the Fed to rein in inflation without triggering a broad economic recession.

The market’s odds of the Fed raising its benchmark interest rate by 1% jumped following the recent inflation report. Wall Street investors have estimated a one in four chance of a bigger upside. However, CME FedWatch reported that traders were slowly losing confidence that the central bank would accelerate monetary tightening so much.

An even more aggressive Fed this week would mean higher borrowing rates for mortgages, auto loans and businesses. This would not mean lower grocery prices.

And that shouldn’t be a surprise.

Tom Hudson is a financial journalist in Washington, DC. He is the content director of the public radio station WAMU.

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