US Federal Reserve to deliver 75 basis point rate rise tomorrow

The US Federal Reserve will shock markets tomorrow by beginning a 75 basis point rate hike cycle in a bid to shake inflation out of the American economy.

That’s according to top Wall Street analysts, who said last Friday’s inflation overshoot will force Fed chair Jerome Powell and rate setters to deliver a monetary policy bazooka to cool price rises.

Living costs are 8.6 per cent higher than they were a year ago across the pond, last Friday’s Labor Department clip showed, much higher than investors’ expectations of a 8.3 per cent jump.

On a monthly basis, core and headline inflation surprised to the upside, prompting Wall Street to hike its forecasts for the pace and steepeness of policy tightening by the Fed.

Investment bank Goldman Sachs lifted its federal funds rate forecasts off the back of the inflation print.

“We have revised our forecast to include 75 basis point hikes in June and July,” the firm’s analysts said, adding the move would “reset the level of the funds rate at 2.25-2.5 per cent, the [federal open market committee’s] median estimate of the neutral rate.” 

“We then expect a 50 basis point hike in September and 25 basis point hikes in November and December, for an unchanged terminal rate of 3.25-3.5 per cent,” Goldman added.

Capital Economics’ chief north america economist Paul Ashworth agreed the Fed will lift borrowing costs 75 basis points tomorrow.

“We previously expected the fed funds rate to peak at between 3.25 per cent and 3.50 per cent in the first half of next year. That forecast is obviously too low, with the peak now likely to be nearer four per cent,” he said.

An article in the Wall Street Journal yesterday said Fed officials are considering “surprising markets” by tightening finance conditions much quicker tomorrow.

Strong price pressures are sweeping through the US economy and are becoming stickier than first thought, causing experts to forecast the Fed will accelerate the pace of its tightening cycle.

The world’s most important central bank lifted rates 50 basis points at its last meeting in May. It tends to move in 25 basis point increments.

Yields on US government debt have shot up on bets the Fed will aggressively bear down on price rises. The yield curve briefly inverted yesterday, a threshold that often predates a recession.

The Bank of England is also anticipated to hoist borrowing costs for the fifth meeting in a row on Thursday by at least 25 basis points to 1.25 per cent. 

Some traders are betting the Bank will sign off on a 50 basis point rise to get ahead of inflation that is already running at a 40-year high of nine per cent.

The European Central Bank last week confirmed it will lift rates for the first time in over a decade next and may even raise them 50 basis points in September.